IR35 Legislation – How Does It Affect Your Business?

Could your business be affected by IR35?

IR35 legislation was introduced as a measure to counter tax avoidance which initially targeted contractors in the IT industry. However, it must always be borne in mind that all contractors who operate their own service companies have the potential to be caught by this legislation.

In short,  IR35 legislation is intended to primarily stop contractors from working via their own personal service companies (limited companies), and setting up a remuneration structure where they pay less tax and national insurance than normal employees who were performing almost identical tasks for the end client.

Contractors often use limited companies as a Personal Service Company to obtain work either direct from an end client or via an agency. HM Revenue & Customs will consider a number of factors in determining the working relationship between the end client and the contractor. For example, the degree of control the end client has and the financial risk the contractor has i.e. is he paid by the hour/day or on a fixed price for a specific task are usually considered.

It is important to remember each contract is considered by the HM Revenue & Customs in isolation and as such, the wording and terms of the arrangement is an important factor in their decision to apply the IR35 legislation to the income received by the service company.

If a contractor is deemed to be a service provider, the shortfall in employers’ National Insurance and PAYE contributions must be computed and this is known as the “deemed payment”. The deemed payment is worked out by deducting a fixed amount of expenses from the income caught by IR35 - there is then a further deduction for any expenses that would have been allowable as an employee. 

The resulting figure is then assessed as gross pay and employers National Insurance (NI) for the contractor. The additional PAYE and NI are then calculated for the tax year (to 5th April each year). The liability must be paid by the 19th April and detailed on the employer’s end of year form (P35) which must be submitted by 19 May after the end of the tax year.