H1 IR35 What Why Who

IR35 Background

Before 2000, HMRC suspected some contractors were avoiding paying the correct amount of tax. They would quit their full-time job on a Friday, set themselves up as a contractor with a limited company and return to the same job on the Monday.

The significant difference is that the client now hires 'A. Smith Ltd' to complete the work, rather than employee 'Andrew Smith'. Critically, limited companies offer the contractor the chance to take some of the income as a dividend which has a lower rate of tax than income tax.

HMRC called it 'disgused employment' - 'A. Smith Ltd' was in effect employee 'Andrew Smith'.

Will HMRC Notice?

Be aware, HMRC look very closely at how contractors trade. They even have a dedicated Tax Unit specifically dedicated to contractors. They can go back years into your professional life and demand you prove you were not in 'disguised employment'.

A big criticism has been that the legislation is unclear - no excuse, it doesn't detract from the reason why the law was introduced in the first place and the principal behind IR35.

It can be difficult to know whether your contract is caught by IR35. Ask 100 employment lawyers to look through your contract and you'll probably get 100 different answers!

You'd be classified as a 'disguised employee' if in every respect you're working like an employee but trading as a contractor.

Genuine Contractors

You would be running your own small business providing your own equipment, like a PC. You'd also have your own office with a website, business cards and letter-headed paper. You would also have your own accountant &/or lawyer. You would advertise for business and maybe employ others.

Genuine limited company contractors would negotiate a price for a job, rather than an hourly rate, they'd fix any problems and make up for delays in their own time.

Disguised Employment

A contractor in disguise would turn up at the client's office and, for example,

1. Only use the client's equipment (eg PC)
2. Have their work checked in stages by a line manager, who would also tell them what they should be doing
3. Carry on in the same way as the client's permanent employees

This is intended purely as an overview of IR35 and in no way meant to be relied on by a contractor determining what tax they should be paying!

Additional information:

• How to Pass IR35
• IR35 In or Out
• IR35 Is an Umbrella the Right Choice
• IR35 True or False
• IR35 Umbrella Companies
• One minute guide to IR35
• The IR35 Test for Contractors
• Umbrella Company Registration
• What is IR35
• What is your best Option Umbrella Company or own Limited Company