| 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.
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| 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.
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| 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.
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| Leaflets |
|
The Inland Revenue provide several leaflets to help the individual
establish their employment status:
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