Intermediaries Legislations IR35

05 January 2016

Intermediaries Legislations commonly known as IR35 was introduced by HMRC in April 2000.

The legislation that aims to identify individuals that are using a 'personal service company' (PSC) or a 'limited liability partnership' (LLP) as an intermediary to avoid paying the correct tax and national insurance and get an unfair advantage according to HMRC, who will not recognise these individuals as self-employed but rather 'disguised employees'.

IR35 was introduced to allow HMRC to crack down on 'disguised employees' and stop the loss of tax and national insurance to the exchequer.

Until 5 April 2015 there was an online system called the business Entity Test to assess whether businesses were at High, Medium, or Low risk of IR35 applying. This was withdrawn after much criticism that it was biased in HMRC’s favour.

Now in order to assist businesses to distinguish between employees and self-employed, an employment status indicator (EIS) tool has been developed which can be found on HMRC’s website.

You answer a series of questions about the working relationship between the engager and the worker and a conclusion is provided, it’s not necessary to provide personal details.

Both the engager and the worker are responsible to distinguish the workers employment status as the engager would have to ensure that they fulfil the tax and national insurance contribution liabilities.

To determine whether you are caught by IR35, HMRC will look at both the way the work is carried out by the worker on daily basis and the written contract between the parties.

The main assessment criteria’s are:

Personal Service/ Substitution

Supervision, Direction and Control (SDC)

Mutuality of Obligations

One of the strongest indicators of self-employment is the right of substitution, where a worker can either provide a substitute or engage a helper to provide a service rather than being individually hired to provide their services personally.

Another test to clarify ones employment status is the degree of Supervision, Direction or Control over how the worker completes their tasks. A Self-employed worker may be asked to perform a particular task or provide a service at a specific time and location but it’s not likely for the client to have control over how the task is performed although this doesn’t affect the rights of the client (engager) to request the work carried out to be of certain quality.

An employed person on the other hand is subject to a high degree of control, as they are likely to be told where and how to perform their tasks.

Finally mutuality of obligation is another area for HMRC to determine an individual’s employment status. A self-employed contractor would benefit from providing their services efficiently and moving to another assignment or task and would not be entitled to expect further work form the same engager. However an employee would be supplied with continues supply of work form the employer and would be expected to carry out the task when he is required to do so.

When work is regularly provided to a contractor HMRC may take the view that an employee status has been created by custom and habit and as a result a great emphasis is been place on the right of the contractor to walk away from a contract early, if they choose to.

If you aren’t certain about your IR35 Statue, we can help check your contract for IR35 Compliance.

We provide a detailed contract review service which can be used in defence of your IR35 status.

If you require any assistance with any aspect of your tax affairs please contact us or get in touch today by calling 0203 039 3993.

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