What is IR35?
IR35 is the common name given to tax legislation which affects how individuals working through PSCs or other intermediaries are taxed.The actual legislation can be found in Chapters 8 & 10 of Part 2 of the Income Tax earnings and pensions act 2003.
IR35 applies where an individual works for a client, but rather than being engaged directly by the Client, the individual works through an intermediary.
If the individual has an interest in the intermediary, such as a shareholder, then the IR35 rules requires an assessment of the relationship between the individual and the Client. This would look at whether the individual is an officer holder for the client, and what the relationship would look like if the intermediary were not in the chain, specifically whether the individual would be an employee or self-employed for tax purposes.
If the individual is considered as being more like an employee, then they are considered as falling inside of IR35, or IR35 applying – which results in an additional tax burden. If the individual is considered to be more like a self-employed person or independent contractor, they are usually outside IR35 or IR35 friendly, and address tax in the same way as any other business.
This assessment is made by looking at both the contracts that are in place and the working practices, and considering whether some of the core elements of an employment relationship are met or not, such as;
- Control – whether the hirer exercises control over the individual
- Personal service – whether the individual is personally obliged to do the work, or can send a substitute
- Financial risk – whether the individual takes a financial risk in the work that they do, such as a risk of non-payment, penalties for errors in the work, or requirements to fix defects
- Integration – whether the individual is viewed as an independent contractor or part and parcel of the organisation.
This assessment, and responsibility for taxes sits with the client in most cases, but will be the responsibility of the contractor if the client is classed as a small company, or operates wholly outside of the UK.
If you would like further information or advice surrounding IR35, get in contact with a member of our team.
Theresa Mimnagh, Director LLB qualified as a solicitor* in February 2004 and previously worked in private practice as an employment lawyer. She joined Lawspeed in 2005 and leads Lawspeed’s client support and audit team.
Her specialisations are in employment law, recruitment law, employment status, IR35 and agency tax, data protection (GDPR), and employment contracts and policies. She leads our team of IR35 lawyers and is responsible for updating our contracts under our contract maintenance scheme. She also heads the employment law team and excels in supporting clients in employment related disputes.
Theresa also is our lead in training on key areas relevant to employment business, including IR35 and recruitment process, and was responsible for delivery of our 2019 programme of IR35 masterclasses and 2023 webinar series.