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IR35 is a new tax legislation announced in 1999 that took effect from April 2000…

The purpose of this legislation is aimed at taxing some contractors and looking to see if there is an employment relationship between an engager and the person being engaged.

Case law says there are three characteristics to be made for an employment to exist:

  • Personal service
  • Control
  • Mutuality of Obligation

Note: If one of the three factors is missing, it means that there will be no employment relationship and IR35 is not applicable.

The government introduced IR35 with the intention of tackling tax and national insurance avoidance schemes. Inland Revenue currently focusses on contractors using the limited company as a personal services company to obtain work either direct from one employer, or one client or one agency. In the view of the Inland Revenue a large number of IT consultants, engineers, non-executive directors and one-man-band companies are currently treated as a self-employed rather than as an employee of the client. HMRC estimates that at least 20% of contractors are definitely inside IR35. Twenty per cent are classified as outside and the remaining 60% are in a grey area in the middle. The IR35 is difficult to quantify and is not a black and white issue.

To decide whether IR 35 applies consider the following questions on every contract that you undertake:

  1. You have to do all the work yourself?
  2. Can someone tell you what to do?
  3. Can someone tell you where you can carry out the work?
  4. Can someone tell you when and where and what to do?
  5. Do you have to work a set number of hours?
  6. Can someone change your task around?
  7. Are you paid by the hour, week or month?
  8. Do you receive any overtime or bonuses?

Note: If the answer for the above questions is ‘yes’ than you are likely to be employee.

If the answer for the below questions is ‘yes’ then you can possibly be classified as self-employed.

  1. Do you regularly work for a number of clients?
  2. Do you work in your time and at your own expense?
  3. Can you decide when to work, what to do and where to provide the services?
  4. Do you agree to do a job for a fixed price regardless how long the job might take?
  5. Do you risk your own money?
  6. Do you provide the main items of your equipment?
  7. You could have an employee.

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