What is IR35 and how do you know if you are concerned?

What is IR35 and how do you know if you are concerned?

  • IR35 on behalf of legislation that HMRC has created to crack down on independent and self-employed contractors who should in fact be employees.

    If you have created a limited company and at the moment your company only has one customer, or if in your customer portfolio only one represents the vast majority of your turnover, you may have heard IR35. Your freelance colleagues must have told you about it.

    Having a large client doesn't necessarily mean you are affected by IR35, however, it's always best to check the rules for yourself to see if you think you might be a disguised employee.

    You will hear HMRC refer to these “employee disguise” limited liability companies as personal service companies.

    What is a Personal Service company?

    Typically, a personal service company is a limited company that has one director who owns all of the stock.

    As the limited company has no employee other than its manager, it will be the manager himself who will do the work. He can exercise his activity either directly with an organization or through an agency.

    The limited company is not seen as a real business but as an empty shell. It operates almost exclusively within the professional services such as IT. 

    Why HMRC doesn't like personal service companies?

    The main reason is obviously fiscal. The owner of a personal services business can earn a living from a combination of salary and dividends and thus pays less tax than an employee.

    Over the years, with the introduction and then the reduction of the dividend allowance, savings have become smaller than before. However, it is even more taxable to do business through a limited liability company.

    The client who is in fact the potential employer takes advantage of this situation to pay less taxes, mainly the national employer insurance component and income tax.

    In addition to the tax savings, there is less administration for them. They don't have to worry about contributing to your pension, giving you vacation or having to deal with sick pay.

    Thus, potential employers have greatly benefited by remaining customers. And the entrepreneurs forgot about the downsides of the limited company in exchange for paying less tax and possibly paying themselves a slightly higher salary.

    How do you know if a business is considered a personal services business and if it falls under IR35?

    Because business, contracts, and every interaction you have with your clients are different, there is no easy yes or no question that lets you know if you fall under IR35 or no.

    Having only one client increases the possibilities, but doesn't immediately make you a candidate for IR35. Then you have to look at the criteria that could make you an employee.

    Are you paid for your time or for delivering a result?

    To begin with, you must ask yourself whether the organization you work for pays for your time or for a result?

    When you're an employee, you can't outsource your assignment if you want to do something else or don't have the time to do it yourself. Likewise, you cannot bring a third party to work to help you because you want to move faster or because you cannot master part of the mission on your own. Here your employer pays you for the time you spend at work.

    If you are an entrepreneur, the customer pays for a result. This means that you can bring in someone else to take your place and do all or part of the mission for you. Likewise, you can get help from another freelancer if you need it.

    So if you are hired to do an assignment but the company you work for would only accept you as the person who will take on that job, you could actually be an employee.

    Can you say no to a mission?

    As an entrepreneur, you have the power to refuse any work you do not want to do.

    The other side of the coin is that the organization for which you have signed a contract has no obligation to provide you with additional assignments.

    You both work on a contract-by-contract basis that ends once an agreed outcome has been produced.

    If there was a power outage at the office, for example, or if you finished your task before the end of the day, could you pack your bags and go home or do you have some extra chores to occupy your time? until the end of the day? If so, you can be considered an employee.

    Do you control how, when and where you do the work?

    As an entrepreneur, you have been hired to deliver an agreed result based on your expertise. This means how the work is done and the times at which it is performed is completely up to you.

    You have the power to use whatever software you choose, follow your own processes and methods, and generally use whatever tools are best for you to complete the assignment.

    As an employee, your employer can control how, where, when and with what tools work is done.

    This means that if to perform an assignment the company provides you with a uniform, gives you access to some of their tools, and tells you how they do that particular job, you may be considered an employee.

    Can you make a profit or a loss on the job?

    A contractor will usually submit a detailed quote. This means that you can earn more money if you are efficient and complete the mission faster than you estimated or you can lose money if it takes longer than expected.

    A contractor will usually submit a detailed quote. This means that you can earn more money if you are efficient and complete the mission faster than you estimated or you can lose money if it takes longer than expected.

    An employee receives an agreed-upon salary and regular payment, regardless of when and how a job is performed. You will also benefit from income protections such as the national minimum wage and holidays.

    This means that if you are paid a fixed hourly or daily rate, regardless of how long you work or how efficient or inefficient you are, it could mean that you are an employee.

    Are you part and parcel of the company organization?

    You can sign a contract with an organization to work with them for a long time, even indefinitely as is the case with accountants or legal advisers for example. While this may make you feel like a regular member of the organization, you will not receive any of the employee benefits for becoming one.

    Indeed, an employee can be promoted, receive salary increases or have access to additional benefits such as membership in a pension plan and have health insurance or a company car.

    So if the company offers you this type of employee benefits. You may be an employee.

    What penalties do you risk if you are caught under IR35?

    If HMRC comes to the conclusion that you are a disguised employee and you fall under IR35, it can enter your revenue and deduct 5% of the authorized expenses. The remaining amount will be treated as your gross income and will be subject to income tax and national insurance.

    The turnover of your limited company therefore becomes your gross employment income and will be taxed as such. They can also back date this over several years.

    What should you do if you feel you fall under IR35?

    If, by asking yourself the questions listed above, you have come to the conclusion that you can be considered as an employee, you should call on an accountant specializing in self-employed who are subcontractors and in particular in IR35.

    The tax consequences of IR35 are huge, so it is recommended to work with an expert.

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