Despite having been in force since 1999, IR35 is heavily criticised by tax experts and the business community as being poorly conceived, badly implemented by HMRC and causing unnecessary costs and hardships for genuine small businesses.

What is IR35?

IR35 is a tax law. It is properly known as the Intermediaries Legislation and came into force in April 2000 as part of the Finance Act. The income tax element of the Intermediaries Legislation has subsequently been integrated into the Income Tax (Earnings & Pensions) Act 2003 (ITEPA 2003), and the NICs element into the Social Security Contributions (Intermediaries) Regulations 2000.

Why was IR35 introduced by the government?

IR35 was introduced to tackle the problem of 'disguised employment'. This is where organisations engage workers on a self-employed basis and usually through an intermediary (Payroll Company), rather than on an employment contract, so they become disguised employees.

Control, Substitution and Mutuality of Obligation

In short, IR35 involves applying three principles to determine employment status. These are known as the principal 'tests of employment':

• Control: what degree of control does the client have over what, how, when and where the worker completes the work
• Substitution: is personal service by the worker required, or can the worker send a substitute in their place?
• Mutuality of obligation: mutuality of obligation is a concept where the employer is obliged to offer work, and the worker is obligated to accept it.

Other factors taken into account to determine whether you are caught by IR35 include the contract type, whether you are taking a financial risk, if you are 'part and parcel' of the engager's organisation, being in business on your own account and provision of equipment. All of this evidence is taken into account, and if the balance of probabilities is that the worker is an employee then IR35 applies. So, for example, if a worker has an unfettered right to send a substitute in their place, personal service is not required and IR35 cannot possibly apply.

What to do if IR35 applies - how to calculate the deemed payment

If IR35 does apply, then the legislation makes provision for paying that extra income tax and NICs. Furthermore, another frightening aspect of IR35 is that HMRC can go back at least six years and evaluate past contracts to see if the legislation applies. That means HMRC can demand income tax and NICs, plus penalties and interest, going back several years, resulting in tax demands reaching six figures.

As per Chapter 10 of the Income Taxes and Earnings Act (ITEPA) 2003, a Status Determination Statement certifies that the engagement has been assessed.

1. Declares a contractor's deemed employment status following an IR35 assessment.
2. Provides reasons for reaching this conclusion.

The requirement for an SDS is not met if the client fails to take 'reasonable care' in arriving at its decision. Should this be the case, the client assumes the position of 'fee-payer' which would typically be held by a recruitment agency.

What constitutes reasonable care?

Employment status lawyers have noted in the context of a contractor facing an inquiry, reasonable care would constitute:

1. Acquiring independent legal advice; and
2. Making a full assessment of an individual basis.

Click the following link, for more information on what an IR35 Status Determination Statement is.