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Not sure whether you fall Inside or Outside of IR35? Use our online IR35 calculator.
IR35 (Intermediaries Legislation number 35) is legislation, first introduced in April 2000, that aims to eliminate tax avoidance and National Insurance Contributions (NICs) avoidance through the use of intermediaries, such as Personal Service Companies or partnerships. IR35 is focused on workers who:
in HMRC's eyes, the key to IR35 is the relationship between the client and the worker. If the relationship is seen to be the same, then HMRC believes that tax and NIC's should be collection in the same manner as a traditional employee, as though employed directly through the company.
How does this work with contracting? Contractors typically provide a specialist skill to augment a companies capability for a short period. This could be to support a project, to trial a new capability, to install technology systems or machinery etc. In these instances, the contractor is providing a service to one ltd company (the client) that would typically be provided by another ltd company (the contractor).
HMRC love Contractors who form their own limited companies as it makes it very clean cut for them to understand the relationship, it's a traditional business model. Some contractors however don't want to form their own limited company, reasons include:
Due to the contractors preference and the clients desire for a temporary workforce, umbrella companies were borne. Umbrella Companies employee the contractors in order to provide accounting a payroll services to the contractors and enable them to work for the client without any of the tax, accounting and HMRC responsibilities associated with running a limited company.
Unfortunately, some umbrella companies became involved in bad practices:
These bad practices led to HMRC tightening up legislation and getting tougher with the industry. This has led to a number of good and bad decisions, the latest complexity is in terms of 'direction and Control'. Contractors who use an umbrella company typically never see the umbrella company, they just use them for the service. Although employed by the umbrella, they don't work for them. They complete work as strategically directed and controlled by the end client (as a contractor who works for their own limited company does).
There are many examples of challenges within the umbrella company industry but there are three key points for you to take away:
This is the most important question a contractor should ask themselves. When IR35 was introduced it was a typically poor planned and conceived HMRC initiative creating more grays than black and white clear cut lines for accountants and contractors to follow.
The resulting confusion over IR35 and it's interpretation resulted in a number of courts cases. These legal cases have provided the framework for an IR35 means test which helps to define whether a contractor is Inside or Outside of IR35 legislation. The IR35 means test was further galvanized in May 2012 when HMRC updated the tests, taking a risk based approach.
IR35 tests are now used by intermediaries (like umbrella companies) to assess whether HMRC would view the contractor as an employee of the end client. iCalculator have provided an online IR35 Status calculator which you can use to confirm whether you fall inside or outside of IR35.
The IR35 Status calculator refers to specific elements of the contract and the individual's working practices and provides a IR35 risk score which is recognized by HMRC. The IR35 risk score defines how likely HMRC are to review whether IR35 applies to you. The higher the risk, the more likely it is that IR35 applies to you and the more likely that HMRC will look at your payroll and accounts. The IR35 risk table is split into three categories:
The IR35 status calculation looks at twelve specific business entity tests as defined by HMRC. These include:
Answer the following questions to receive a IR35 Risk score for your contract. The IR35 Guage above will alter as you answer the questions.