IR35 is legislation brought in by the Government in April 2000, to counter what HMRC class as a disguised employment.

IR35, what does mean for you?

If your contract has the same level of risk, responsibility, liability and control as a permanent employee, then you would be classed as inside or caught by IR35 legislation. This means you will have to pay full tax and full National Insurance (instead of the usual salary and dividends from the profits of your company) and reduced expenses i.e. you'll earn less money. This is because HM Revenue and Customs believes that as you aren't taking the financial risks or have the same level of control as a director of your own limited company, you aren't entitled to the same corporate tax structure.

Kind of working practices and contractual conditions are HMRC looking for to see if you're inside or outside IR35?

Below are a few hints and tips. Please be aware this is not a comprehensive list, IR35 regulations are extremely complex but the brief notes below should provide a rough indicator:

• Right of Substitution
• Mutuality of Obligation
• Right to Control
• Provision of Equipment
• Financial Risk
• Basis of Payment
• Client Integration

In addition to this, the actual working practices would be examined along with the contract under with the person is engaged - it is therefore important that the actual working practices of the contractor are reflected in the contract. More and more are we seeing the contract being overlooked by Inspectors and reliance being placed on the working practices themselves to determine the IR35 status.

Implications

If an engagement falls within the scope of IR35 (if the client states that their contract is caught by the legislation following professional review of the above tests), they are required to pay the majority of their income (less a few qualifying deductions) as salary - this is referred to as their IR35 'deemed salary'.

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