IR35 Overview

What is it all about?

This ruling by the Revenue attempts to capture tax lost whereby individuals have set themselves up as Limited Companies supplying services but in reality are performing a task for a client in a manner similar to being an employee.

In addition, it is now law that contract agencies can only pay limited companies for contractor services. This means you need to be operating as a limited company if you are using an agency to supply your services.

What does this mean?

For the tax man this means that they are receiving less tax than if the person was employed (where there would be employers and employees national insurance plus PAYE to pay).

How do you decide?

This is not as straight forward as the number of clients or contracts that you have. Even with several contracts, each one will need to be considered on a case by case basis.

Guidelines for classifying as employee:

  • You work a set number of hours per week/month
  • You have to do the work yourself – you cannot hire someone to do it on your behalf
  • You are directed on how to do the work and when
  • You are paid by the hour/week/month
  • You get overtime pay
  • You work at the premise of the person you work for or other place as determined by them
  • You generally work for one client at a time

Indicators that you are not an employee:

  • If you make a loss on the contract
  • If you provide the main equipment to carry out the work
  • If you are able to hire other people to do the work for you and you pay them
  • If you have a number of customers

If you are caught by these rules then you will need to make payments of tax and NI on the earnings from the contract at the end of the tax year. You are able to deduct from this salary 5% which allows for the expenses in running a limited company plus certain travel expenses, professional subscriptions, premiums for professional indemnity insurance.

How this works in practice

On a monthly basis, you pay yourself a salary and operate PAYE and NI deductions as required.

At the end of the year (5th April) a deemed payment will be calculated as follows:

  • Earnings from contract
  • Less: 5% for expenses
  • Less: expenses you would have claimed for if an employee
  • Less: pension contributions
  • Less: employers NI paid on salary taken in year
  • Less: salary paid in year
  • This gives you the gross deemed payment including employers NI
  • Divide by 1.138 to derive deemed payment which will be subject to PAYE and NI
  • Note this calculation is for PAYE and NI purposes only. In your company accounts, you will see the expenses and salary only.

We advise all freelancers to have their contract reviewed by independent providers – note this is a review not just of the contract but of the working practices. Some providers will ask that the end client sign to confirm the realities of the day to day working practices.

See here for a list of expert providers who we have worked with.

If in doubt, contact your local HMRC Office – the number for IR35 enquiries 0845 303 3535.