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Faq
IR35 – What is it?
IR35 (otherwise known as the Intermediaries Legislation) is a piece of tax legislation that came into effect in April 2000. The aim of the legislation was to eliminate the avoidance of tax and national insurance contributions through the use of intermediaries such as personal services companies (PSC’s) or partnerships, where an individual worker is not genuinely self-employed.
The legislation ensures that, if the relationship between the individual and the client is one of disguised employment (i.e. would have been an employer/employee relationship but for the intermediary) the worker will pay tax and national insurance on a basis which is fair in relation to what an employee and employer would broadly pay.
What does this mean to you?
If you provide your services to a third party (the client) through a limited company (an intermediary) then you have to consider IR35 for every contract you undertake.
A limited company contractor who falls outside of IR35 rules would usually withdraw a small salary and take the rest of their income as dividends instead of salary. Dividends are not subject to national insurance contributions or PAYE income tax.
If the limited company contractor’s contract falls within IR35 they can still claim traveling and accommodation expenses, 5% of their turnover, benefit from the VAT flat rate scheme and receive interest on the funds held within their own company, but most of the income from that contract will be deemed payment and subject to PAYE and national insurance contributions.
IR35 does not affect contractors who work on PAYE contractors or those who work through an umbrella company, as umbrella company contractors are effectively employees paying PAYE.
How can I tell if I am inside IR35?
To establish your IR35 status you should consider whether you are “self-employed” as per HMRC’s employment status guidelines. In the event that HMRC challenge your employment status, they will look at the overall relationship between yourself and the client and will consider a number of factors to determine if your contract is within the IR35 rules.
Even if you are deemed as being inside IR35 then there may still be benefits to trading through your own limited company. For more information on IR35 please read the guide below put together by Professional Passport.
What are the different ways to contract?
There are number of different ways you can operate as a contractor, the three main ones are:
PAYE
A PAYE contract is a relationship whereby the agency deducts tax and National Insurance from the contractor’s gross pay. The contractor will also be entitled to a basic 28 days statutory holiday per annum and will accrue Holiday Pay at a rate of 12.07%. It is important to remember that this is NOT a contract of employment. It is a contract for services and you will not be an employee.
PAYE contractors will be considered “in scope” for the purposes of the Agency Workers Regulations (AWR); please see our information on the AWR.
Umbrella company contractor
An umbrella company acts as an employer to agency contractors who work under a fixed term contract assignment, usually through a recruitment agency.
Recruitment agencies issue contracts to a limited company. The umbrella company issues invoices to PRS Recruitment and, when payment of the invoice is made, will typically pay the contractor through PAYE with the added benefit of offsetting some of the income through claiming expenses such as travel, meals, and accommodation.
Limited Company (Consultancy)
Any contractor who wants to work through a Limited Company but does not want to go through an umbrella company will be sent a Consultancy Contract. Under this model, the onus is on the individual contractor to ensure that they pay the appropriate tax. Usually a consultancy will claim to be outside of IR35 rules.
