What is IR35?
Interview with Seb Maley of Qdos Consulting
IR35 is a concept that still causes much confusion and concern within the contracting community. Understanding the ins and outs of the legislation can be a hard task, and the question ‘What is IR35?’ is still a frequently asked question.
Seb Maley, Associate Director at Qdos Consulting is an expert in IR35 and is well versed in HMRC’s involvement with contractors, having followed its advances and changes since the legislation began. We spoke with Seb to see if we could shed some light on IR35, discussing its background, changes and its future.
We put some common questions to Seb, ranging from the legislation’s beginnings to its progressing future. Understanding the legislation is essential in safeguarding IR35 compliance, and we hope that his answers will help aid understanding within the contractor community.
Q. What is IR35?
A. IR35 is the name commonly given to the Intermediaries Legislation, which was introduced by the Government in April 2000. The legislation is designed to target people using limited companies to reduce the amount of tax and NI they pay, where they should actually be employees of the person they are working for.
Q. Does it apply to me?
A. Anyone using a limited company or partnership that tends to work for a client for a prolonged period could be subject to IR35. It could apply even if you have contracts with multiple clients, although each engagement would be considered separately.
Q. How does it work?
A. Unfortunately there is no definitive way of knowing whether you are inside or outside of IR35 and one of the key problems with the legislation is that there are a lot of grey areas. Any contractor operating outside of IR35 and taking dividends from their company runs the risk of an IR35 enquiry, where HMRC will conduct a full review of the contractor’s situation.
Q. What is the risk?
A. If HMRC discover that the contractor is what they call a ‘disguised employee’, they will demand all backdated tax and national insurance that the contractor would have paid had they been a permanent employee of their client. Obviously for most contractors this could be financially crippling and HMRC will add interest and a possible penalty to the total sum.
Q. What do HMRC look at in an enquiry?
A. HMRC will look at the written contract that the contractor has with a recruitment agency or client, but they will also review the true facts of the engagement and the contractor’s relationship with his client. Some of it is common sense; if you are treated like an employee you should be taxed as one. However, there are also a lot of areas that are open to interpretation and this is where things can become quite protracted and messy.
Q. What can I do about it?
A. Firstly it’s a good idea for contractors to understand the basics of the legislation before they make any decisions and be very careful not to be pushed into a particular route by an agency or accountant without fully understanding the potential consequences. When a contractor has a contract, it’s vital that they get it reviewed by an independent expert so they can make a decision about whether to trade inside or outside of IR35. It’s also worth considering tax insurance, so you get expert representation if you are subject to an IR35 enquiry.
IR35 can have a devastating impact on limited company contractors, and we hope that Seb’s advice above will help to clarify some of the misconceptions that exist around the subject.
Qdos are a recognised body of IR35 experts and specialists in contract compliance and have been FW Accounting’s IR35 partner firm for several years. If you’d like to find out more information about IR35 please contact us.