IR35 is HMRC’s term for off-payroll work. It is sometimes known as the “intermediaries legislation” as it applies to people that work via an intermediary rather than directly under an employer. This intermediary is usually the individual’s own limited business, especially for the self-employed. It can also be a partnership, another personal service company, or an agency.
IR35 is meant to detect freelancers and businesses avoiding paying the necessary tax by operating as ‘disguised’ employees.
Companies that do not violate IR35 are referred to be “outside IR35” and will not be subject to any additional fines or penalties. Even if they are a one-person business, these businesses operate independently from their clients, choosing when, when, and how they work.
According to the Companies Act, a business is defined as “small” and hence exempt from the IR35 reform if it meets two of the following criteria:
- The annual turnover does not exceed £10.2 million.
- The balance sheet total does not exceed £5.1 million.
- They do not exceed 50 employees
Why is the intermediaries legislation important?
Non-compliance with IR35 may result in the high cost of defending yourself against an HMRC investigation. If caught, there’s also the possible burden of being forced to pay any unpaid taxes.
Does IR35 apply to me?
There are three key factors used to determine your IR35 status:
- Control, supervision, and direction
- Substitution
- Mutual obligation
Other factors come into play as well. They are less essential but are still used to determine whether a person is inside or outside of IR35. These are:
- Regularity of payment and method of payment
- Alternate Work
- Premises
- Involvement inside the corporate structure
- Personal financial involvement and risk
- Employee benefits
- Intentions of both parties
- Contract termination agreement