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Who does IR35 affect?

IR35 Much of the publicity surrounding IR35 has concentrated on its affect on the IT industry where a lot of contractual work is carried out.
The reality is that it covers all business sectors and has a bearing on any business arrangement where:
  • an individual (known as a worker) provides services to another person (client)
  • under arrangements involving an intermediary (such as a company or a partnership)
  • in circumstances such that if the contract had been made directly then the worker would have been an employee of the client
The range of professions where people work through service companies is wide. Examples include:
  • Medical staff
  • Chief executives of large PLC's
  • Legal and accountancy staff
  • Construction industry workers
  • Clerical workers
  • Press officers
  • To list but a few
It is important to understand that IR35 applies to anyone operating through an intermediary regardless of:
  • what their line of work is
  • what intermediary is being used: a Limited Company or a Partnership
IR35 The legislation aims to identify if the relationship between the worker and the client would have been one of employment had it not been for the existence of an intermediary.
Where the intermediary company provides its employee on terms, which would normally constitute employment with the client, this is called a 'Relevant engagement' and the IR35 rules apply.
It follows that the subject of 'employment status' requires consideration, which is not without complexity since there is no definition of employment to rely on in tax law. This requires the question to be considered in light of case law, which for this area involves non-tax cases. This detail of this is not considered here.
It is important to remember that this test of employment applies to the Worker and the End Client, not the Agency or the Intermediary.
Secondly, IR35 does not re-classify the worker as an employee of the client in the eyes of the law but merely dictates the tax treatment to be applied to the worker.
HMRC's approach to Employment Status has been to produce a manual, which provides guidance to contractors on the subject together with a list of factors indicating whether or not a worker will be deemed to be employed or not. Click here for IR35 status.
Where the worker is found to be a 'deemed employee', an IR35 salary calculator is used to establish what is to be taxed under PAYE and NI.
Except for a small list of deductions (5% for company running costs), the Intermediary will effectively be required to tax all the earnings of its employee (the contractor) as salary.
Remember that mileage and subsistence claims will not be allowed as expenses as the contractor will now be in deemed employment with the client.
It is in this way that HMRC removes the taxation advantage available through using an intermediary.