The Intermediaries Reporting Legislation was established in the UK in April 2000 with the intention to stop tax fraud by limited company candidates in contract roles. If your role is deemed inside IR35 it means you should be paying tax as if you were an employee and if you are outside you can use your limited company and take advantage of the tax benefits as appropriate.
Since April 2021 the decision around a role being inside or outside lies with the client and as such the liability if this decision is wrong lies with them.
Put simply IR35 exists to stop contractors working as ‘disguised’ permanent employees and benefiting from the tax advantages of being a contractor without accepting the increased responsibilities of company ownership. The question to ask is, if the limited company where taken away how is the contractor different from the standard permanent employee?
What is HMRC looking for to see if you’re inside or outside IR35?
Unfortunately, there is not a helpful checklist to use. Below are a few helpful insights but please be aware this is not a comprehensive list and that IR35 regulations are extremely complex.
It is worth being aware that the role will be considered in the whole and not being able to satisfy one requirement will not make the role inside IR35 automatically, likewise being able to show success in one are does not make the role outside.
In the context of IR35 a right to substitute means a contractually enforceable right for a Limited Company to replace its representative, subject only to reasonable criteria such as suitability. A real-life example would be that the contractor originally chosen to carry out the work decides to take a few weeks break and the client can’t wait for them to come back. If there was a substitution clause the Limited Company would send a suitable alternative that could cover the work.
Expectations between the parties
Another important factor is the relationship between the client and the contractor. At the end of the contract is there an expectation that the client will offer, and the Limited Company will accept a renewal?
If there is a master/servant relationship in place between the client and Limited Company, it is likely the role will fall inside IR35. For a role to fall outside IR35 the Limited Company should be able to decide how they deliver the services and be free of oversight to ensure the job is done.
HMRC have detailed and complex legislation when it comes to IR35 that extend further than the above basic tips and is always changing based on when cases make their way to court. You should seek specialist advice if you require any further information.