What is IR35?
In April 2000, HMRC introduced rules which affect the way personal service companies (PSCs) operate, so as to remove opportunities for the avoidance of tax and national insurance contributions. The rules are not intended to prevent workers from providing their services through a personal service company, but rather to discourage the practice of routing engagements through PSCs simply in order to achieve a more favourable tax and national insurance regime.
The legislation states that: ‘If through your company you are doing the sort of work for your (ultimate) client that would normally be undertaken by an employee working directly for that client, then 95% of the income (both fees and expenses) received by your company during the tax year, excluding VAT, must be paid in that tax year, as salary and employer’s national insurance contribution, to you the individual earning those fees.’
Identifying engagements where the IR35 rules will apply
The legislation applies to anyone supplying his or her services to clients through a PSC, and whose contract would have been a contract of employment with the client, if the worker had worked directly for the client instead of through the PSC. IR35 applies only if the contract provides for services to be carried out personally.
The rules apply in respect of each engagement, in the same way that the rules of self-employment apply to individuals operating without service companies. Note that the facts of the case will take precedence over careful drafting of contracts.
For each of your contracts, we recommend that you obtain an independent review to establish its IR35 status. You can take our 'IR35 Employment Test', however this is simply a guideline and does not constitute an official decision on the status of your contract.
Calculation of salary under IR35 rules
IR35 goes on to state that: “The calculation must be based on your total income (fees and expenses) and from this 95% figure certain permissible expenses may be deducted. The resulting figure is the total of salary and employer’s national insurance contribution for the period.”
To help you calculate the amount that must be devoted to paying your salary, please read Calculating your salary under IR35.