The IR35 rules were introduced by the Finance Act 2000. They were introduced by the former Inland Revenue in 2005. The IR35 rules were introduced as a measure to remove opportunities for the avoidance of tax and class 1 National Insurance Contributions (NICs) by using an intermediary, such as service companies, partnerships or limited companies. The IR35 rules only apply to those situations where an individual would otherwise be classed as an employee of the client. IR35 can be complex. Any workers that subcontract their work should take legal advice to ensure their tax affairs are in order. A solicitor can assess any working environment and relate this to the current IR35 employment law.
Prior to the IR35 rules, an individual could provide their service to a client through the use of their own limited company, or other intermediary, and avoid paying tax and class 1 NICs. The client would pay the limited company, which would then in turn pay the individual a minimal wage.
The individual would pay income tax and NICs for the low amount of income received from their limited company. They would then receive large dividends from their limited company, which are not subject to NICs. The main aim of the IR35 legislation is to ensure these individuals are subject to the same taxation laws as individuals performing the same work under standard PAYE conditions. PAYE means ‘Pay As You Earn’ and involves an employee’s income tax and NICs being deducted at source by their employer. Employers should take legal advice from a specialise solicitor to ensure their PAYE systems are set-up correctly, and the terms of IR35 are properly observed.
The IR35 rules apply to those situations where an individual would be paid a standard salary as an employee for performing the same role if they were not working through an intermediary. Therefore, in order to apply the IR35 rules it will need to be determined if the individual could be considered as an employee of the client. A solicitor can help a company make that assessment.
There is no single definition of an employee. The title is usually applied to a person who has a contract of employment with an employer. However it is the nature of the contract and the reality of the working relationship that is conclusive. For example, if a person has to do the work themselves, has to work a set amount of hours per week, and has someone telling them what to do and how, then it is likely they are an employee for tax and NIC purposes.
If an individual could hypothetically be considered an employee of the client, then they will be subject to the same tax and NICs as an employee performing the same role, even if they are employed through an intermediary. IR35 and employers need to be careful not to breach employment and tax laws. The advice of a specialised solicitor can ensure all employment law is met in full.