The term “IR35” refers to the sets of UK tax legislation designed to combat employment tax avoidance by workers and the companies hiring them via an intermediary, typically a personal service companies. IR35 targets situations where an individual is engaged “off-payroll” as an independent contractor and can achieve employment tax savings, while the client company is not required to pay employer national insurance contributions when, in reality, the worker would have been considered an employee if they were providing their services directly to the client company.
Why IR35?
IR35 was introduced in 2000 to tackle the problem of “deemed employment”. This is where companies engage workers on a self-employed basis rather than on an employment contract, so they « disguised » employees. The IR35 rules are meant to ensure that in such situations, workers and companies pay broadly the same Income Tax and National Insurance contributions applicable to employees.
Who may be affected by these rules?
You may be affected by IR35 if you are:
- a worker who provides their services through their intermediary and has one client;
- a client who receives services from a worker through their intermediary; or
- an agency providing workers’ services through their intermediary.
If the rules apply, Income Tax and employee National Insurance contributions must be deducted from fees and paid to the department of the UK Government responsible for the collection of taxes. In addition, applicable employer contributions must also be paid by the client company.
How is IR35 determined?
Essentially, in order to determine whether IR35 is applicable to a given situation three main principles are used:
- Control: what degree of control does the client have over what, how, when and where the worker completes the work
- Substitution: is personal service by the worker required, or can the worker send a substitute in their place?
- Mutuality of obligation: mutuality of obligation is a concept where the employer is obliged to offer work, and the worker is obligated to accept it.
All of this evidence is taken into account to decide whether the relationship between the worker and the company is really a business to business relationship or if it is actually an employer/employee relationship and thus subject to IR35.
However, it should be noted that there is no single test to determine employment status for tax purposes and many different factors may be considered by an inspector.
It would generally be recommended that the written contract perfectly matches the actual relationship between the worker and the client company. However, it should be noted that to determine if the contract is one for employment, when IR35 applies, the focus is always on the real nature of the working relationship rather than on the written contract.
How can IR35 be avoided by companies and contractors?
IR35 does not apply to workers employed by a french umbrella company (know also as : EOR – Employer of record)
Umbrella companies such as Prium Consulting (which is an EOR, Employer of record) act as an intermediary between the independent worker and the client company. As a French company, Prium Consulting would not be subject to IR35. Therefore, when using the services of Prim Consulting, an independent contractor can work for a client company long term without having to worry about any IR35 issue.
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