IR35 is a Finance Act, which was established and came into act in the year 2000. The main reason why it was introduced was to ensure tax payment by businesses which may not be genuine on the nature of their businesses, that is, they have contractors as employees. Ideally employees in these businesses should pay Income Tax and National Insurance Contributions as required by HRMC after investigations are one to determine whether they pass or fail the IR35. It has not been received well because it affects small businesses and it would cost them.
For people operating on their own accounts in business, here is a guideline on how to know whether IR35 applies or does not apply to you as a contractor;
- – If the client controls how the contractor performs tasks assigned, then it may not pass the IR35. This means that, in a case where it is the client who comes up with the days the contactor works, the duration from starting time to ending time every day, and also has some statement defining that contract, the IR35 will be applicable.
- – When a contractor is dealing with a client, there should be no any employment statement that should require the contractor to be the one always present for all the tasks. It is a business to business service, and therefore the contractor should be allowed to find a replacement anytime whenever necessary. Otherwise if there is clause that restricts such, it will mean that the IR35 is applicable because there is mutual obligation.
- – If the contractor has to always take assignments from the contractor with no excuses, then that contract fails the IR35 test. But if the contractor can even receive contracts from other clients and maybe work on them the same time provided delivery is done as required, it passes the IR35 test.
- – When it comes to payment, it should be in a form of a service fee not like an employee’s salary which is fixed, guaranteed and so it would definitely fail the IR35 test. This is because when a contractor is in an agreement with a client, finances are determined at the end of the contract, depending on the quality of work done, the amount of hours put in and the rate at which the tasks are carried.
- – A contractor is required to use their own materials or tools during a contract. If there is a clause in the contract which stands for this, then it passes the IR35.
- – A contractor has also to find out about the client and the kind of contract being issued by the client. Because there are cases where some contracts have been said to fail the IR35 but a client may bring it out after sometime under a different name. If taken, the contractors may find themselves in a trap and face the IR35.
Seeking advice before taking up contracts is very crucial to know whether you will be an employee or you are just a contractor to avoid suffering extra costs in your business. The nature of the relationship between the worker and the client will be used to determine whether the contract fails or passes the IR35.