The reason for the introduction of IR35 was HMRC’s belief that the Exchequer was losing substantial amounts of tax and national insurance due to the use, by individuals, of service companies or self-employed status in circumstances where, in reality, they were employees who should be subject to full Pay As You Earn (PAYE) rules.
In particular HMRC were concerned about these practices in the IT and construction industries where the use of consultants is widespread.
IR35 sets out the general rules which individuals must apply to their own circumstances. There are a variety of tests which should be applied in considering whether or not PAYE applies and it should be emphasised that these are matters which are of relevance to both sides of a contract to perform services. This is because there are potentially costly consequences for both parties in the event that IR 35 is not applied correctly.
For the party paying for the services there is the possibility that HMRC will deem amounts paid to be net of tax and national insurance and thereby 'gross up' these amounts and demand the difference from the paying party.
And for the party providing the services there could also be additional tax to pay as expenses incurred in providing those services would be severely limited, and of course, the likelihood would be that the employing party would seek to recover from the service provider any additional tax it had to pay to HMRC .
So it is important to ensure that these rules are understood and observed. Guidance is provided by HMRC and as part of this guidance a number of 'business entity' tests have been published any of which could be used as part of an assessment as to whether someone is employed or self-employed.
These tests are:
- Does the business have any premises?
- Does the business buy its own professional indemnity insurance?
- Does the business use other workers?
- Does the business spend more than £100 per month on advertising?
- Was the business owner previously working for the same customer under PAYE?
- Would the business have to bear the cost of rectifying its own mistakes?
- Does the business stand the risk of incurring bad debts?
- Is there negotiation over pay rates?
- Can the business substitute one person for another, and have they ever done so?
- Can the business make more profit by changing the way it works?
- Does the business have a business plan?
IR35 does not threaten those who have set up their own businesses and who are genuinely self-employed. It targets those which would otherwise be classed as 'employees' when carrying out a particular contract. It applies on a contract by contract basis, so it is not the case that if a self-employed person has only one client, IR35 automatically applies. What matters are the terms and the conditions which apply to each individual contract. It is perfectly possible for an individual to have several contracts running concurrently, one of which falls within IR35 and to which PAYE rules apply.
 Related articles on Designing Buildings Wiki
- Appointing consultants.
- Business plan.
- Construction contract.
- Payroll companies.
- Personal service company.
- Professional indemnity insurance.
- Umbrella companies.
 External references
Featured articles and news
Read about Belgrade's Brutalist landmark - the Western City Gate.
Read about the measures that can be taken by individuals to protect and minimise exposure to outdoor sourced air pollution.
Government announces leaseholds on new-build houses will be banned.
Transport Secretary announces public consultation into London's funding of Crossrail 2.
Have a look at some of the most impressive concert stage designs of all time, including Pink Floyd, U2, Rolling Stones, and more...
What is the Home Quality Mark? Find out how it can help you when buying/renting a new home.
Business Secretary launches £246m Faraday Challenge to establish UK as world leader in battery technology.
Government announces new plans for regulations to improve safety and security awareness of drone users.
Read our introductory article to the various different types of fuel.
IHBC book review: Charles Barry’s monumental struggle to rebuild the Houses of Parliament.
Read about RSHP's British Museum extension which has been shortlisted for the 2017 Stirling Prize.
Read our introductory article to building a house extension.
More updates from DCMS about the large-scale testing of cladding systems and the number of buildings affected.
UandI secure resolution to grant planning consent for major new regeneration project.