IR35, commonly known as ‘off payroll working’ forms part of UK tax legislation aimed at preventing tax avoidance by workers supplying their services to clients through an intermediary (‘the intermediary’) such as a limited company/firm; in other words, where a contractor is an employee in all but name.
The legislation ensures that such workers, who would otherwise rank as employees if their services were provided directly to the client, pay the same level of tax as would be the case as they would as employees.
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Operation of IR35 | Kangs Tax Avoidance Solicitors
The intermediary, whilst usually a Personal Service Limited Company (‘PSC’), can also be either:
- a partnership; or
- an individual.
The rules affect any:
- worker who provides their services directly to a client through a PSC
- client who receives services directly from a worker through a PSC
- agency providing services to a client via a worker’s PSC.
As the result of tax advantages that can be afforded to the intermediary, IR35 ensures that the correct taxes are being paid by the intermediary.
IR35 looks to the relationship between the intermediary and its client. Despite a contract being made between the intermediary and client, if in reality, the relationship ought to be that of an employee/employer then the worker/contractor, through the intermediary, could be defined as a ‘deemed employee’.
If the contractor’s contract is in the public sector, the client must determine whether IR35 applies and, should that be the case, the contractor must be placed onto the payroll and deduct income tax and National Insurance before payment is made.
If the contractor’s contract is in the private sector, the intermediary is required to make an extra payment in respect of the additional tax and NI that HMRC would have received on an equivalent employee’s wages.
Determination Of IR35 | Kangs Civil and Criminal Tax Solicitors
HMRC examines the relationship between the PSC and its client and will assess whether or not the intermediary falls in or out of IR35.
HMRC will usually apply three main principles in its assessment:
- Control: what degree of control does the client have over what, how, when and where the worker completes the work,
- Substitution: is personal service by the worker required, or can the worker send a substitute in their place?
- Mutuality of obligation: mutuality of obligation is a concept where the employer is obliged to offer work, and the worker is obligated to accept it.
Other factors which HMRC will consider include the:
- type of contract in place,
- conduct of the parties,
- intentions of the parties,
- party responsible for provision of equipment.
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