Employment Status and IR35

This is one of the topics which I am asked about, or discuss, with clients most during the average year, so I thought it would be good to summarise the main issues here so you can all refresh your memory / knowledge on this.

Why is this important?

Generally there are three distinct ways that workers ply their trade

1. As an employee of a business / company that they do not control

2. As a self-employed individual (or via a partnership)

3. Via a limited company that they control (i.e. they are a director)

As the amount of tax and NICs that an individual ends up paying varies depending on which of the 3 routes above are taken, it matters very much to HMRC that the employment status of all workers is being correctly applied.  And the consequences of getting it wrong can be very significant in terms of back PAYE / NIC and penalties to pay.

How to decide

Basically, if you are operating as either a self-employed individual or via an owner-managed limited company, you may be called upon to justify to HMRC why you should not actually be regarded as a employee of your client companies.  Now for some businesses, that justification is easy, but for others, particularly where a significant part of your income is generated from either one, or a small number of end clients, it may be harder to justify.

For people operating via their own limited company, they need to have regard to the intermediaries legislation, known as IR35 which was introduced in April 2000.  In May 2012, HMRC issued 12 business tests, for people to score themselves to see whether IR35 might apply to them.  Although aimed at limited companies, I feel that it provides an equally good framework for those operating as self-employed individuals to decide whether or not they should really be classed as an employee.  Each business test has a score attached:

Business Premises (10)                                                Business Plan (1)

Professional Indemnity Insurance (2)                            Repair at own expense (4)

Efficiency (10)                                                               Client risk (10)

Assistance (35)                                                              Billing (2)

Advertising (2)                                                                Right of substitution (2)

Previous PAYE (minus 15)                                               Actual substitution (20)

A score of less than 10 is high risk and a score more than 20 is low risk.  So if you have any doubts, go ahead and score yourself and if your score is low, please contact us for further advice.

To read HMRC’s own guidance, with some examples, check out www.hmrc.gov.uk/ir35/guidance.pdf