The Law and

Understanding IR35

IR35 is a regulation introduced by the UK Government (HMRC), to attempt to categorise people operating as self employed who received the benefits of being a permanent employee. Those deemed ‘within IR35’ were then no longer eligible to the operating benefits of being a UK Limited Company or sole trader, with income being taxed in the same way as a permanent employee, including employer national insurance, employee national insurance, & income tax on the revenue received.

For years, many contractors operated through limited companies or sole trader businesses, legitemately & legally benefiting from minimising their tax payments. Although operating under the umbrella of a business, a number of these one-man businesses were in fact barely differentiated from permanent employees, receiving a vast number of the perks offered exclusively to employees.

Initially, many business owners attempted to avoid being categorised within IR35, by utilising contractual loopholes, as opposed to operating differently.

This only created more pressure from HMRC to get engaging businesses to take ownership of taxation responsibilities, insisting that any contractors were then liable for operating within IR35, and paying full tax, without expenses on earnings.

For ‘genuine’ businesses, with separate budgetary considerations for sales, marketing, advertising, technology overheads, research & development, and many other costs that the umbrella type businesses did not need to consider, this created a headache of having to distinguish themselves even further in the way they operate, & to distinguish just how many different clients they may work with, among other factors.

As a result, anxious businesses requiring skilled individuals such as a fixed term & highly temporary interim project manager for a 3-6 month period began to categorise these ‘outside IR5 roles’ as being contractually obligated as inside IR35.

As a result, many contractors reverted to permanent employment, as without the taxable benefit, there were few, if any advantages of being classified as self-employed. However, a single person micro-business, working to create revenue generating opportunities became harder to distinguish from the guised 1-man contractors.

In order not to be deprived of tax, HMRC took a hard stance, trying to push to onus of proof  of being Outside IR35 onto the business, with large penalties & tax arrears awarded to businesses deemed as trying to bend the IR35 rules to avoid, or potentially evade tax.

For businesses, whether 1-person or 100 person, being distinguished as outside of IR35 became harder, especially where one client was responsible for the majority of earnings in a single year, when work was carried out through a single on-site representative.

As a result, many contractors bundled together into small professional services companies, with the accountant dividing up the revenue in the form of dividents, based on how each person’s effort contributed to the central pot. In essence, this approach made the multi-director company appear to be a veiled loophole, but one which was quickly quashed by looking at the payment structure, with each ‘director’ receiving revenue proportional to the invoices that were attributed to each client for which the director, in essence, worked full time.

Although these 1-man companies or small umbrella organisations create a significant amount of deliberate confusion, HMRC continues to be increasingly keen to find ways to disprove contractors claiming to be outside of IR35, where it is deemed that IR35 evasion is taking place.

For those wanting to operate a legitimate sole trader micro-business, or small Limited Company, it is important to be aware of the traps that might result in being categorised as within IR35.

Going far beyond access to any employee only benefits that a client may offer, by having multiple income sources from unrelated clients, carrying out work away from the client’s location, providing adhoc work, & being able to substitute an alternative supplier, it all helps to distinguish a micro-business from an employee.

Commission Jobs supports micro-businesses operating outside of IR35, giving you access to skilled talent on an adhoc or assignment basis.

For more information on how to operate outside of IR35, & how to set up any contracts to help avoid being wrongly classified, contact us, or Follow our Outside IR35 group on Facebook