IR35
For a definition and general guidelines regarding IR 35 go to:
www.ir35calc.co.uk/what_is_ir35.aspx
From 6th April 2000 limited company contractors providing personal services will have to pay to the Inland Revenue PAYE tax and National Insurance Contributions on income received from "relevant" engagements. Those engagements which are considered to be relevant are those which indicate a relationship between the contractor and the Client which, in all the circumstances would amount to employment but for the existence of the limited company.
In determining whether an engagement is a "relevant" engagement the Inland Revenue looks at all the facts of the relationship between the contractor and the Client and the contractor and the agency, if they are supplied to the client through an agency. Their investigation will include a consideration of the terms of any contract in existence but will not be limited to the contract. Therefore if the facts of the relationship indicate employment but a Consultancy Agreement has been issued indicating a self-employment relationship this will not protect a contractor from any claim for PAYE and NIC's on income received from that engagement.
It is worth noting that the Inland Revenue have extensive investigative powers and also powers to impose penalties on those who have failed to pay tax due for a period of six years after the tax becomes due. Contractors may be considered to be employed for tax purposes in relation to one or more engagements and self-employed for tax purposes in relation to others. Also as a contractor is engaged on an assignment of one month or more on standard contract terms which appear to meet the definition of employment he will be treated as employed unless he can demonstrate a recent work history of engagements with the characteristics of self-employment. Contracts of less than a month, and cases where there is a pattern of other work, will be looked at by the Inland Revenue on a case by case basis.
The following is a guide to thecriteria which is used by the revenue/courts to ascertain employment status:
Client has the right to tell the contractor what, when, where and how to do the work. It is this right to control the work that is important. Employment
The contractor has the right to decide where, when and how the work is performed. However some direction or supervision by a client may be necessary. Self-Employment
Substitution
It is essential that a particular individual carries out the work. Employment
The contractor has the right to choose whether to do the work personally or get a helper or hire somebody else to do the work. Self-Employment
Equipment
Provision of facilities or equipment or materials by the client or employer, Employment
Provision of own tools or equipment and purchase of materials at own cost. Self-Employment
Financial Risk
Payment for work done and no element of loss if the work is not completed or materials cost more than budgeted (commission not included). Also the employer bears the cost of training the worker. Employment
Payment by a fixed fee or monthly sum no matter how long the work takes to complete. The cost of training is borne by the contractor himself. Self-Employment
Opportunity to Profit from Sound Management.
No ability to affect his income (except by job related bonuses) by organisation of the work or a reduction of overheads. Employment
Efficiency in sound management affects the take home profits. Self-Employment
Dismissal
Provision for a period of notice of termination. Employment
Termination will usually be only on completion of the task or project or if the terms of the agreement are breached. It is usual to provide for circumstances in which termination will be justified. Self-Employment
Basis of Payment
Fixed wage or salary and additional payments for overtime, bonuses, reimbursement of expenses incurred in the course of work. Employment
Fee quoted for total job. No extra payment for expenditure not agreed in advance. Fees may be estimated by reference to the period the work is expected to take but the contractor is likely to be bound to the estimated fee. Self-Employment
Benefits
Right to receive sick pay, holiday pay, pension, benefits and expenses. Employment
None of these. There is no right to receive pay for periods when no work is performed and no right to job-related benefits. Expenses may be reimbursed. Self-Employment
Length of Engagement
A long engagement or open-ended arrangement. Employment
Usually engaged for the specific project. Possibly a series of small task-related contracts, which may or may not overlap. Self-Employment
Part and parcel of the organization
The contractor performs a role which is integral to the clients organization e.g. managing staff Employment
the role is task orientated and the contractor is not treated as one of the staff. Self-Employment
Personal Factors
The contractor is unlikely to havepurchased facilities to carry out the work at home and is unlikely to have a number of different employers. Employment
The contractor has a number of contracts for different clients and will probably have invested in office facilities or equipment and pay staff or an accountant to invoice or provide other facilities. Self-Employment
Intention
If all other factors present a neutral impression of the contract so that it is not possible to decide whether it is employment or self-employment, the intention of the parties will be deciding factor. Self-Employment
IR35 websites