IR35 is a piece of tax avoidance legislation introduced in April 2000 that affects all contractors who work through a limited company or partnership. Sometimes, HMRC refer to such a company as a “Personal Service Company” since the contractor is the owner and director of their own company and they alone provide their company’s service.
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INSIDE & OUTSIDE IR35
inside IR35’ means that you are considered, for tax purposes, an employee of your end client and therefore subject to PAYE.
If a contractor was to be considered “inside IR35”, it means that they aren’t seen as self-employed by HMRC and will get taxed like an employee as a result. On the other hand, “outside IR35” means that a contractor is self-employed and works through their own company.
HOW DO I KNOW IF I AM INSIDE OR OUTSIDE IR35?
HMRC has developed an online employment status tool (CEST) for contractors unsure of their liability under IR35. If you are receiving the same rights as that of a permanent employee, for example, holiday entitlement, sick pay, or if you are receiving certain benefits, you will likely be deemed as inside IR35. HMRC uses the following factors to test your IR35 eligibility.
If your employer has the option to send a substitution to complete works in your place, it suggests that you aren’t providing a personal service, and the worker isn’t an employee.
If your employer controls your workload and the way in which it is carried out, it suggests you are inside IR35 as you are not deemed as providing a specialist service.
3. Mutuality of obligation (MOO)
If both parties pass the above tests, it is unlikely that MOO applies as it will be deemed outside IR35 anyway. MOO can be present in both contracts of service and contract for service.
If a contractor can make a profit or a loss i.e. financial risk this would suggest that the contractor is outside IR35
The way in which you actually provide the services is crucial, and whilst HMRC usually begin an enquiry by looking at the contractual terms, they will seek to clarify the terms directly with the end client. If your contract does not reflect reality, any positive elements of the agreement would have very little bearing in an IR35 enquiry. You should therefore always consider a review of your working practices when determining your status.