IR35 legislation was introduced in 2000 specifically to challenge the tax position of those individuals who provide their services via an intermediary service Company.
The advantage to the individual of such an arrangement is that they pay less Income Tax and National Insurance than a directly employed worker. These types of service company arrangements continue to be popular in the IT, construction and media sectors.
The legislation enacting IR35 is set out in the Social Security Contributions Regulations 2000 (Regulations) and Chapter 8 Part 2 of the Income Tax Act 2003 (ITA).
IR35 legislation allows HMRC to look behind any intermediary service company (normally a limited company or partnership) and ignore the legal relationships when determining how the individual should be taxed.
In the absence of the intermediary service company, if an individual:
- can be regarded as an employee of the client for tax purposes; and/or
- can be regarded as employed in the ‘employed earner’s employment’ by the client;
then the individual will be subject to tax and NIC as a directly employed worker and tax and NIC should be deducted via PAYE by the intermediary service company.
What is an Intermediary Service Company?
An intermediary service company is typically a personal service company (PSC) that sells the work or services of an individual (or group of individuals) that is owned and operated by that individual (or group of individuals). It can also be a partnership where the individual is a member of the Partnership and entitled to at least 60% of the profits of the partnership.
Example: Arthur is a plasterer who provides his plastering services through A Limited of which he is the sole director, shareholder and worker. A Limited us contracted by B Limited to provide A’s plastering services. A Limited charge out Arthur by the hour and invoice B Limited monthly for the services provided.
When will IR35 legislation apply?
IR35 will apply if the following conditions are met:
1. An individual personally performs service for a client (or is obliged to do so);
2. The services are provided under arrangements involving an ‘Intermediary service company’; and
3. Had arrangements been made directly between the individual and the client, the individual would have been regarded as employed by the client.
Essentially the regulations are there to determine whether, if not for the limited company or partnership the individual would in fact be an employee of the client.
What is a Relevant Engagement?
Under the IR35 Regulations liability for income tax only applies where there is a ‘relevant engagement’.
A relevant engagement will arise if:
- The Individual receives a payment or benefit which is not employment income
- Conditions relating to the intermediary service company are satisfied, including: o The intermediary service company is not an associated company of the client;
- The client and the intermediary service company are not under the control of the individual;
- The individual has a material interest in the intermediary (more than 5% share capital) ; or
- Payment or benefit received by the individual from the intermediary service company represents payment for services provided by the individual to the client.
What are the consequences of a Relevant Engagement?
Where an individual is treated as having undertaken one or more ‘relevant engagements’ under IR35 the;
- The individual is treated as employed by the intermediary service company;
- The ‘relevant engagements’ undertaken by the individual are treated as if they were undertaken in the course of employment.
Resulting in the individual and intermediary service company or partnership being treated for tax purposes as employee and employer. Any liability for income tax and NIC will rest with the intermediary service company.
If you have any questions or require any guidance regarding IR35 or Employment Law, please call Andrew Lester on 01785 223440 or email Andrew.Lester@orj.co.uk who will be more than happy to assist you.