The 1999 budget introduced a new policy of taxation targeted at the small business owner.

In the budget of March 1999 the government introduced a measure intended to remove a loophole in the tax system. This is where an individual contractor could set up his own limited company (personal service company) or partnership to gain national insurance advantages. If you are one of the many contractors with a limited company it is essential that you find where you stand with the new rules.

How Does IR35 Affect You?

If you already have your own limited company and take only salary then IR35 may not affect you at all. It mainly affects you if, previously, you took dividends to reduce national insurance contributions. The key to IR35 is whether your contract is a "relevant engagement". You will need to pay employers national insurance contributions as well as the same NI contributions of an employed person. You will also have to pay tax and NI on money you retain within the business and this could add up to a significant cost.

How Do You Test For A "Relevant Engagement"?

If your working conditions are similar to an ordinary employee, and you have a long contract, there is probably not much you can do to avoid IR35.

But it is possible that, in your particular circumstance, your contract has business characteristics consistent with self employment. The inland revenue have produced useful draft guidance on their website at http://www.inlandrevenue.gov.uk/IR35/

Some particular features which appear important are:

• Mutuality of obligation?
• Does worker have to do work if available?
• Does client have to ask you to do work if you are available?
• Umbrella test-are you in business on your own account?
• Number of different clients?
• Have you a recent history of self employment engagements?
• Are you actively seeking work before, during and after the contract?
• Do you have an advertising spend?
• Will you, after termination of the engagement, carry on performing services?
• Do you have an office base?
• Do you employ office staff?
• Do you have employers liability and professional indemnity insurance?
• Long contracts (1 year plus)?

Even though you are in business on your own account (see above) it is possible for a particularly long engagement, or one particularly subject to a clients instructions, or one where you are working alongside, or on exactly the same basis as the clients own employees be deemed to be subject to IR35. So avoid long open-ended contracts.

Fundamental status tests

• Do you have the ability to substitute or hire another person to do the work on your own terms?
• Can you make a loss on the contract (eg correcting unsatisfactory work at your own expense)?
• Can you profit if you work more efficiently?

Important status tests

• Do you have the final say in how you do your work for the client or can someone tell you at any time what to do and when to do it?
• Are you mixed in with employees doing very similar work?
• Do you supply your own equipment and facilities or do you work at their premises?
• Do you have other clients at the same time?

Other status tests

• What is the length of your engagement?
• Do you work set hours and are you paid by the hour?
• Can you get overtime pay?
• Do have no holiday pay or sick pay and no notice period?
• How are you paid? On invoice?
• Does your client have the right of dismissal?

When Do I Pay The Additional Bill?

This can effectively be done in 2 ways. By taking all earnings as wages on a monthly basis or taking a lower amount during the year and paying the balance (the deemed payment) on the 19th April after the end of the tax year). Amounts also need to be entered on your P35 end of year payroll tax return.

How Do I Draw My Deemed Pay?

This can effectively be done in 2 ways. By taking all earnings as wages on a monthly basis or taking a lower amount during the year and paying the balance (the deemed payment)on the 19th April after the end of the tax year). Amounts also need to be entered on your P35 end of year payroll tax return.

How Do I Draw My Deemed Pay?

If you wish to withdraw deemed pay out of the company then this has to be taken out as dividends. A claim needs to be submitted to the IR by the 31st January following the end of the tax year. It can include payments taken out as dividends during the tax year in question.

What Happens If I Ignore IR35?

The Inland Revenue will check your situation during their normal PAYE audits. They can therefore backdate the situation for 6 years and go after you, as an individual if the company defaults. Agencies have already been asked for information about contractors and large employer companies will also be surveyed. Interest at the very minimum will be levied and there is also a penalty structure for deliberate omissions.

Accounting periods ending 31st March and closely before

It is important, for cash flow reasons, to change the year end to 5th or 30th April.

Further Information

Contact us for a no-obligation initial discussion about IR35 as it applies to you.