The regulations state that if your work falls under IR35, then 95% of the fees you earn (less certain allowable expenses of employment, which include pension premiums) have to be paid as salary to you, the person who has carried out the work, and thus pay employed levels of tax and NIC on this income.
As a general rule, if you are doing the sort of work for your client that would normally be done by an employee of your client, then your assignment falls under IR35. So, for example, if you are working on maternity cover, replacing a manager or director who is sick or has been made redundant, your assignment will normally come under IR35.
If your assignment is project-based or qualifies as consultancy work and you expect to be there until the project, or your part of the project is completed, it would normally fall outside IR35.
However, IR35 is complex and there are many factors to be considered when deciding IR35 status. Some of these are: the extent and degree of control exercised by the client over the worker, the worker’s right to engage helpers of substitutes, mutuality of obligation between the worker and the client, financial risk of the worker, provision of equipment, basis of payment of the worker, personal factors, the existence of employee rights, termination of the contract, whether the worker is part and parcel of the client’s organisation, exclusive services and mutual intention.
Each and every assignment should be assessed individually as to whether it falls within IR35 or not. This includes examining not only the content of any written contract but also the actual working practices. Some assignments are difficult to judge, and in these cases you should seek the advice of an employment law specialist.
Ignoring IR35 puts you at risk. HMRC may come along several years later and if you have got it wrong they will charge you for all the underpaid tax, NI contributions (employee and employer) and can charge penalties which start at 100% of the debt. If you can demonstrate that you have taken “reasonable care” to determine your status, by way of an IR35 contract review, penalties can be reduced to zero.
If you wish to obtain an IR35 contract review, we recommend Bauer & Cottrell, who are a leading independent UK specialist in all aspects of employment status and IR35. A single IR35 contract review is £175 + VAT.