An IR35 refresher By Nichola Ross Martin

What is IR35?
A special set of rules found in s 48 to 61 of ITEPA 2003 in which the income of certain companies or partnerships is taxed as if it were the deemed employment income of the company owner or business partner.

When does IR35 apply?
It applies when:

an individual personally performs services for a client, and

the contract to supply those services is made between the individual's own limited company, or partnership, and ultimately the end client, and

the circumstances of the arrangement are such that, if the individual had contracted directly with the client, he would be regarded as an employee of that client.

In other words, it applies when what might normally be expected to be the employment income of an individual is passed through a company or partnership – 'disguised' employment income.

The reason that income may be passed through a company or partnership is irrelevant, as is the motivation behind trading in this way. At one end of the spectrum the arrangement might be for tax avoidance, but at the other it might be because the end client will only contract with companies, and will not take on individuals directly.

What sort of companies and partnerships are affected?
IR35 applies to companies if:

The worker (or his family) controls more than 5% of the ordinary share capital of the company, or

The worker (or his family) is entitled to receive more than 5% of any dividends from the company, or

The worker receives, or could receive, payments or benefits from the company which are not salary, but could reasonably be taken to represent payment for the services provided to clients

IR35 applies to partnerships if:

The worker (or his family) is entitled to 60% or more of the partnership's profits, or

where most of the partnership profits come from work for a single client, or

where a partner's share of profits is based on his income from relevant contracts

A 'family' includes blood relatives and civil partners.

Employment status
If it is not obvious, it is necessary to review the contract and the facts of the case to see what factors are relevant in determining whether the contract is one of service or for services. is not such an easy matter to determine in practice, which is why IR35 is time consuming for HMRC to try and enforce. Contractors must self-assess their employment status for the purpose of their tax returns, and if HMRC does not agree, then status will be determined by a tribunal or the courts.

General reading
HMRC publish a leaflet, IR175 'Supplying services through a limited company or partnership: A general guide' This gives full links to employment status checks. This appears on AccountingWEB.co.uk's

Managed service company rules
The MSC rules were brought in to counteract schemes to avoid IR35, whereby workers supplied their services via MSCs. Following legislation introduced on 6 April 2007, income from MSCs is treated as deemed employment income.

IR35 worked example
Bill is an IT consultant, and he and his wife Mrs B have set up their own limited company "Our Co Ltd". They own 50% of the shares of the company each. Bill provides IT programming services to End Client under a three year contract. Mrs B does the company bookkeeping, but does no work for End Client.

End Client pays £65,000 to Our Co Ltd for the services provided by Bill in 2007/08. All these services are performed at End Client's premises.

Bill pays himself a salary of £20,000 and pays Mrs B £5,000 during the year under PAYE. Our Co Ltd reimburses Bill for his travel expenses from home to End Client, which comes to £2,500, subsistence of £500, a subscription to IT weekly magazine of £65 for the year. It also pays Bill and Mrs B rent of £500 per month for use of home as office. Our Co Ltd also pays £3,000 into Bill's stakeholder pension scheme and £500 into his wife's.

Just before the end of the tax year, Bill, on taking professional advice about dividends, discovers that he would not pass any of HMRC's employment status tests! IR35 applies to his contract with End Client. He must therefore self assess and account for a deemed payment under the provisions as if it were paid on 5 April 2008. He has to account to HMRC for PAYE and NI by 19 April 2008, and the deemed payment will be included on his P60 and Our Co Ltd's P35.

IR35 deemed payment calculation:

		£	notes
Fees received by Our Co Ltd from client		65,000
Less:	5% of fees (£65,000)	3,250	1.
	Pension contributions	3,000	2.
	Salary	20,000	3.
	ERs NIC on salary	1,895
Excess		£36,855

Deemed employment payment:	£36,855 x 100/112.8	32,672
Ers NIC:	£32,672 x 12.8%	4,182
		£36,855

Notes

1. The 5% deduction covers the expenses of Our Co Ltd, but there is no deduction for any of Bill's expenses, as his travel and subsistence would not be allowed if he worked directly for End Client (his travel is disallowed as he cannot claim that he works from home as his home is not where any of his employment duties are performed). His magazine subscription is actually taxable benefit in kind (reading magazines is not in performance of being an IT programmer), so Bill could have accounted for this on his P11D as a benefit and been taxed on it. It would then have been deducted the amount from the deemed payment calculation. His accountant suggested that he takes the administratively easier option of just not deducting it from his deemed payment. None of the expense payments to Bill's wife's are deductible in the deemed payment calculation - the 5% covers bookkeeping and overheads such as phones.

2. Only Bill's pension contribution is deductible, (see 1 above).

3. Only Bill's salary and the employers NI thereon are deductible.

Further reading on IR35
AccountingWEB.co.uk's