The consequences of IR35 regulations depends on what your role is.
IR35 Worker(s)
HM Revenue & Customs say that if you are the director or owner of a company that may be affected by IR35 you are responsible deciding if the engagement falls under IR35. In short, you can’t plead ignorance.
HM Revenue and Customs also say that some workers are ‘not aware’ if they are caught by IR35, especially at the start of a contract. However, regardless of this they stress that you have agreed to the terms and are providing the services therefore it is up to you to find out if you are caught by IR35. They suggest checking the terms and conditions of the contract or submitting the contracting to them so they can give their opinion.
Of course by submitting the contract you are bringing yourself to the attention of HM Revenue and Customs so think carefully if this is what you want. Regardless of this, they are simply providing an opinion – it is not a legally binding decision – and they are more likely to advise that you are being caught by IR35.
IR35 Intermediary
An intermediary is, in HM Revenue and Customs definition, the legal entity that sits between you and the client. This is normally your limited company or partnership.
In this situation your limited company or partnership is responsible for the amount of money you have been paid during the tax year that is caught by IR35. They say
“All payments and benefits received by the intermediary from relevant engagements in the tax year must be totalled. The intermediary must operate PAYE and pay Class 1 NICs on all earnings from the engagement (known as a relevant engagement), after deducting a limited allowance for expenses and capital allowances, pension contributions, secondary class 1 NICs, and in-year salary and taxable benefits. The resulting amount will normally be treated as paid at the end of the tax year, and be taxed as a payment chargeable to income tax as employment income and subject to Class 1 NICs.”
In other words it is your limited company or partnership’s responsibility to pay the appropriate amount of tax if you are caught by IR35. As the limited company director you are responsible for the actions of the limited company so you are responsible.
IR35 Client
The client has no responsibility as regards workers tax or National Insurance Contributions (NIC’s).
You may find that clients will only deal with contractors who have limited companies. This is because from their perspective they have no responsibilities as regards sick pay, holiday pay and other benefits that employees would expect. This makled the client’s life easier.
IR35 Composite Companies
A composite company is a specially created company which has individual contractors as its members. It enters into the contract with the client or agency and pays the contractor a dividend as well as a small salary from the income generated from the contract.
Composites are subject to IR35 because of the dividend element, umbrella companies are not as there are no earnings that are not already chargeable to Schedule E income tax and national insurance unless the umbrella company makes payments out by way of dividend.
Where salaries, which are subject to PAYE, are not paid a composite company must consider whether it meets the definition of a Managed Service Company as defined by the MSC Legislation, and if they do they must perform an MSC deemed payment.
If the composite company does not come within the MSC Legislation it must consider whether particular engagements fall within the IR35 legislation, and if they do an IR35 deemed payment arises.
IR35 Agencies
there is normally a recruitment agency between you, the worker, and client. However, the IR35 regulations have been written in a way that makes it highly unlikely that the recruitment agency would be the intermediary. This means that the agency would not be responsible for tax or NICs. Instead this responsibility will lie with your limited company.
IR35 Scheme Promoters
There are all sorts of IR35 based schemes such as the so called 85% scheme, umbrella companies and composite companies. Scheme promoters should firstly consider whether the scheme they provide meets the definition of Managed Service Companies. If business models do meet the definition of an MSC, the MSC Legislation must be applied.
If the scheme is not an MSC then HM Revenues request that scheme promoters make the workers fully aware of the terms, conditions and possible IR35 implications of the relevant contracts they are entering into.
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