The IR35 legislation was introduced by HMRC (Her Majesty’s Revenue and Customs) in April 2000 and was intended to combat tax avoidance. It affects all contractors who do not meet HMRC’s definition of ‘self-employment’ and applies to anyone working via an intermediary such as a company or partnership. Over time, since the introduction of the legislation, tests have been developed from the results of legal cases which indicate whether or not an individual’s working practices are likely to fall inside or outside of IR35. In this document we will cover:
- The Right of Substitution
- Degree of Control
- Mutuality of Obligation
- Use of Own Equipment
- Having More than One Client
- Financial Risk
Extract from The How will IR35 Affect Me Guide:
In the latest landmark IR35 case, HMR&C presented the contractor in question with a £141,000 when the Commissioners decided that in 2003 the contractor was outside IR35 but from 2004 onwards he was inside; despite working at the same site for the same client during the entire period. IR35 determines whether or not a contractor is entitled to draw dividends from their limited company.
If a contract falls outside of IR35 you may; if inside IR35 you are deemed by HMR&C to be a ‘disguised employee’ and therefore must be paid via PAYE. An additional tax liability, interest and penalties can be applied if a contractor who should be working inside IR35 works outside.
IR35 investigations invariably take years to complete and decisions can be appealed by either side. In the case of JLJ Services Ltd v HMR&C in 2011, the contractor had actually retired by the time the case came before the Commissioners.
An Umbrella Company must employ you under a permanent contract of employment and pay you via PAYE. So, if you are working with ContractorUmbrella Ltd there is no risk to you from the IR35 legislation. Download our guide to find out more; you should ensure that you have a full understanding of the IR35 legislation before deciding how you will operate as a contractor as the consequences for getting it wrong can be severe!
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