What happens in an IR35 review?

Tuesday 16th September, 2014
Contractor Info

The Intermediaries Legislation (IR35) has been in place since 2000 and it remains as relevant as ever, with limited company contractors needing to make sure they are in compliance with the rules to keep out of trouble with HM Revenue and Customs (HMRC).

Providing their circumstances allow them to, some contractors opt to engage the services of an accountancy service provider, such as PayStream and any reputable accountancy service provider will offer an IR35 review to ensure a contractor who is choosing to work in this way, has the right IR35 status in order to do so.

IR35 recap

IR35 legislation was introduced on 6th April 2000 and was brought in to tackle the issue of disguised employment. It applies to contractors who are working for a client through an intermediary. An intermediary is an entity such as a partnership or limited company (also known as a Personal Service Company 'PSC').

Before IR35 was introduced, a worker could use an intermediary to avoid being taxed like an employee and paying Class 1 National Insurance (NI). By working through an intermediary, a worker could take money out of the intermediary by way of dividends instead of salary which does not attract PAYE and NI.

It became common practice for individuals to leave employment on, for example, a Friday evening and return on Monday morning as a limited company contractor. This meant that although they were carrying out exactly the same job as before, they were paying less in tax and NI than the conventional employees. HMRC perceived this as tax evasion.

The government decided that new rules were needed to stop this loophole and the Intermediaries Legislation was born.

What to expect from an IR35 review

With HMRC increasing their activity where IR35 investigations are concerned it is now more important than ever for a contractor to be confident that they are working in the correct way. The aim of an IR35 enquiry is to assess a worker's employment status and ascertain whether or not they should be paying roughly the same tax and NI as an employee.

At the start of an IR35 enquiry, a contractor will generally receive a letter from HMRC asking whether he has considered IR35. He may have to provide evidence to support his opinion that he's not within IR35. If HMRC have further queries after reviewing the initial evidence, they may ask for a face-to-face meeting, although this is not mandatory, and you can continue the enquiry by writing.

When HMRC has finished its enquiry, it will issue a written opinion. If you disagree with the decision, you can appeal directly to a tax tribunal if necessary.

How to remain compliant

The easiest way to get peace of mind on your IR35 status is to ask an expert, such as PayStream, to carry out an IR35 review on your circumstances and they will provide their expert opinion as to your level of risk. A good IR35 review service involves both a review of the contracts in place and how you interact with your client on a daily basis - your working practices.

You can also take the Business Entity Test which indicates the likelihood of HMRC checking whether IR35 applies to you by considering the business arrangement overall. It is made up of a series of weighted questions whose answers are allocated a plus or minus score. A medium or high risk score does not put you automatically inside IR35. You should still consider IR35 on each separate assignment and at intervals during the assignment.

It's best for contractors to take regular advice on whether or not they fall within the scope of IR35 and to demonstrate that they took reasonable endeavours in making the right decision.

For more information on our IR35 review services please call 0800 197 6516 or email IR35@paystream.co.uk.

The aim of an IR35 enquiry is to assess a worker's employment status and ascertain whether or not they should be paying roughly the same tax and NI as an employee.