The IR35 legislation was introduced by HMRC in April 2000 and is intended to combat tax avoidance. Any contractor that is deemed to be employed (rather than self-employed) is said to fall under IR35. In that case the contractor is required to extract all the money out of his limited company as salary (instead of dividends) and to pay both the employee and employer Class 1 National Insurance (23.8% of gross salary, to increase to 25.8% next year). Moreover, since April 2007, after the introduction of the Managed Service Company (MSC) legislation, contractors can only receive dividends if they operate their own personal Limited Company. If they receive payment through an intermediary then they can only receive payment via PAYE, which means paying income tax and both employee’s and employer’s national insurance, even if they fall outside of IR35.
It's easy to understand why a number of contractors want to ensure that they do not fall inside of IR35. HMRC has put together a number of simple questions that one can answer which will help determine the IR35 status. If you answer "yes" to the following then it is likely you will be deemed a "disguised employee" and will therefore fall inside IR35:
- Do you have to do the work yourself?
- Can someone tell you at any time what to do, where to carry out the work or when and how to do it?
- Will you work a set amount of hours?
- Can someone move you from task to task?
- Are you paid by the hour, week or month?
- Will you receive overtime pay or bonus payment?
