| What
is IR35? |
|
IR35 was introduced by the Inland Revenue as an anti-avoidance
measure aimed at countering the use of personal service
companies (PSC). The PSC was a tax efficient way of
providing services where the consultant could draw a
small salary and make up the equivalent of their salary
with dividends, such dividends did not attract National
Insurance Contributions.
|
| Who
does it affect? |
|
Where a worker provides services on behalf of an intermediary
to a client, IR35 may deem the intermediary's receipts
from the worker's engagement to be earnings from employment
under Schedule E.
The intermediary is usually a personal service company,
though it can also be a partnership or an individual.
A worker can be caught by the new rules where the intermediary:
- is
a company and he owns 5 per cent or more of the
company, or receives dividends in respect of a relevant
engagement;
- is
a partnership and the worker is a partner either
entitled to more than sixty per cent of the partnership's
profits (the rights of relatives being aggregated
for this purpose) or receives a profit share based
on income from relevant engagements; or
- is
a partnership or a sole trader and the worker is
an employee receiving payments from the intermediary
in respect of a relevant engagement.
|
| The
Legislation |
|
The rules are contained in:
The
new rules only apply to work that would be regarded
as employment if undertaken directly for the client.
The income and expenses in connection with such 'relevant
engagements' has to be separated out and apportioned
to compute the deemed Sch. E payment for PAYE and NIC
purposes. Certain expenses are allowed against the deemed
remuneration. |
| The
Judicial Review of IR35 |
|
The Professional Contractors Group (PCG) took the Inland
Revenue to court on the basis that IR35 was not compatible
with European Community law. In December 2001, the Court
of Appeal ruled against the PCG in deciding that IR35
was legal. The PCG did not appeal to the House of Lords
and as a result IR35 is now entrenched in the statute
books.
|
| IR35
& The Employment Status Test |
|
The method used by the Inland Revenue for establishing
whether the contractor falls under the IR35 legislation
is now commonly known as the Employment Status Test
(EST). The EST has been in existence for well over a
century and is used to establish whether an individual
is employed or self-employed. The test has now been
extended to incorporate the PSC.
|
| Leaflets
|
|
The Inland Revenue provide several leaflets to help
the individual establish their employment status:
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