IR35 is the common name for the Intermediaries Legislation, Chapter 8 Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
It was introduced in 2000 and aims to tax a consultant as if they were an employee should their client trading relationship have full characteristics of employment instead of a supplier to customer. Historically HMRC have had very limited success when claiming consultants have been caught by IR35, however in recent years have had much greater success against some high profile TV presenters who work directly for their client.
IR35 rules allow a judge to imaginarily remove the company from the trading chain and to then judge if the relationship is effectively an employment instead of business to business. The contract terms between the parties are scrutinised at as well as the working practices. Legal precedent has shown that there are important criteria that indicate which type of relationship exists. These include:
the intentions of the customer and supplier as to what type of relationship they want
who has the right of control
if the work can be sub contracted/substituted
who has the risk and insurance for defective work
If the supplier must be paid if they have failed to deliver work
If the client is obliged to provide work to the supplier
Most consultants who find work through UK work finding agencies are in a business to business type of relationship and do not fall foul of the extra employment taxes of IR35. Generally speaking, End user clients of contractors and consultants usually do not want an employment relationship with them (otherwise they issue an employment contract). However in 2017 and 2021 HMRC began to enforce changes to IR35 that make it the obligation of the end customer to determine the nature of the relationship. With the volume of workers, and potential financial risk of getting these determinations wrong, we saw many end clients simply making blanket rulings on all of their supplier contractors. This saw many contractors who traded and should be trading outside of IR35, forced into contracts that were now deemed inside of IR35. These contractors were paid and taxed via the PAYE employee system rather than being paid via their Ltd company.
Due to this legislation, we recommend clients undertake contract reviews and working practice appraisals to show their IR35 diligence in talking their obligations of determining employment status seriously. Nasa Consulting have advised many clients on their IR35 status and have never had disagreement with HMRC on the result.