To give the full name, the Inland Revenue 35 better known as IR35 is a tax legislation introduced by the HMRC (Her Majesty’s Revenue and Customs) and the government with an aim to weed out disguised employees and collect the tax that the government rightfully deserves. The problem is that the legislation does not have a proper demarcation to differentiate between people who fall under the category of IR35 legislation. However, there are four ways or features that are analysed.
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- Do you have the control?: This is the very first question you should be asking yourself when it comes to the IR35 legislation. You should be able to convince the HMRC about the level of control you exert over your contractor company. This also does not have a clear cut defined line, but having an optimum level of control over the work you do is an ideal way. You should be able to decide the kind of services you perform, where you perform them, when you perform them and how you perform them. In other words, any contract between two companies should not involve one party dictating work to the other; rather it should be simply one company engaging the service of other.
- Are you vulnerable to the financial risks?: Another way to ensure that you do not fall under the IR35 legislation is to prove that you are at a potentially equal risk of financial losses as any other director of similar contracting companies. This is because it is quite obvious that you would not be faced with any potential financial risks whatsoever if you were just an employee of the company. If you are a director of the company, you will definitely be vulnerable to the financial risks.
- What are your working obligations?: According to the norms of the HMRC, the right to dismiss another one is a key in determining whether the relationship is that of an employer-employee or that of limited company-client. In other words, if you are obliged to take on every bit of work they offer or give you, then the relationship is more of an employer and employee, the IR35 legislation would be applicable.
- Does the working equipment belong to you?: Surprisingly, this is a key factor that the HMRC would be closely looking at while trying to establish the status of a contractor. The HMRC believes that the ownership of the working equipment like the laptops that are used to do the job is a key in determining the relationship between the client and the contractor. Say, if the contractor is providing the working equipment like the laptops, engineering instruments for taking readings, ladder for painting, then the contractor is at a potential financial risk, and this is something the employers hardly do. So, if an employer provides you with laptops and other similar gadgets for completing your work at hand, the HMRC probably has another reason to argue that you fall under the IR35 legislation.
- Do you enjoy any employee benefits?: If you do, you are definitely not a director and are an employee liable to pay the IR35 legislation tax. If you want to prove yourself as a legitimate director of a limited company, you should first ensure that you do not enjoy any of the employee benefits, If you slip on that, be prepared to sit down with the HMRC IR35 team soon enough.