IR35 Forum

Consequences of ignoring the legislation (IR35) __(Posted: 46 weeks ago)

[Inland Revenue] monitor compliance with the legislation as part of our general programme for supporting voluntary compliance and for tackling non-compliance. Our programme of compliance activity is designed to ensure that taxpayers do meet their obligations to pay the correct tax and NICs.

Where we find that the incorrect classification has been applied in respect of a particular engagement, we have a duty to ensure things are put right for the past and, where appropriate, for the future. Interest and penalties may be charged on any additional tax/NICs due as a result of any review or enquiry.

The circumstances in which the legislation applies __(Posted: 46 weeks ago)

If you provide your services to a client (the end-user) via an intermediary, typically a service company or partnership, and the intermediary does not meet the definition of a Managed Service Company, then the IR35 legislation may apply to engagements with that client.

Broadly, it applies to those engagements where –
you personally perform services for another person (the client);
the services are provided not directly with the client but under arrangements involving an intermediary; and
the circumstances are such that, if you had provided the services directly to the client under a contract between you and the client, you would have been regarded for income tax purposes as an employee of the client and/or, for NICs purposes, as employed in employed earner’s employment by the client.

In addition you must receive or have rights entitling you to receive a payment or benefit that is not employment income.

The intermediary must also satisfy certain conditions.

It is therefore necessary under the legislation to construct a hypothetical contract between the worker and the client based on all the circumstances including the terms and conditions of relevant contracts and the actual substance of the arrangements between the parties. Subject to meeting the other conditions, if that hypothetical contract would be one of service then the engagement is within the legislation.

The existing employment status tests are used to decide whether the hypothetical contract between the worker and the client would be a contract of service/employment. The courts lay down the criteria used to decide who is an employee. More information on the criteria to be used can at Employment Status.
Extended rules for NICs purposes

The IR35 NICs legislation is slightly different from the IR35 tax legislation in that it is not just those engagements involving a hypothetical contract of service that are subject to it.

Some earners are treated as employed earners for NICs purposes although for tax they may be self-employed. This means that certain engagements may be within the NICs intermediaries legislation but not the tax intermediaries legislation. Occupations that may be affected include lecturers, teachers, instructors or those engaged in a similar capacity in an educational establishment; office cleaners and cleaners in any similar capacity; and entertainers. The same is true of those holding non-executive directorships via a service company.

Inland Revenue (re: IR35) __(Posted: 46 weeks ago)

The Intermediaries legislation was introduced on 6th April 2000. It was first proposed by the Chancellor in the 1999 Budget and details were given in the Budget press release numbered IR35. Following extensive consultation, revised proposals were announced in a new press release dated 23 September 1999. However, the legislation is now commonly referred to as ‘IR35’.

The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise -
For tax purposes, be regarded as an employee of the client; and
For NICs purposes, be regarded as employed in employed earner’s employment by the client.

Prior to the introduction of the legislation, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a Personal Service Company, in the form of dividends instead of salary. As dividends are not liable to NICs, the use of a dividend remuneration strategy results in the worker paying less in NICs than either a conventional employee or a self-employed person. And PAYE would not apply to the dividends.

The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary the worker pays broadly tax and NICs on a basis which is fair in relation to what an employee of the client would pay.

On 6 April 2007 Chapter 9 ITEPA 2003, more commonly known as the Managed Service Company (“MSC”) Legislation, was introduced. The MSC Legislation applies to individuals providing their services through intermediaries which meet the definition of a Managed Service Company.

An intermediary must consider whether the MSC Legislation applies before considering IR35. Intermediaries that do not meet the definition of an MSC must continue to consider IR35.
For more information