10. I've got my first contract, now what about IR35?

What is IR35?

The IR35 legislation is designed to increase the NIC revenue from the service industry, which on the whole has found it more tax efficient to distribute income as dividends, usually subject to the payment of a small salary. To this end, it introduces the concept of "deemed salary" which will be taxed and subject to NIC as if it has been paid as a salary.

In order to retain some logic to this treatment it is necessary to identify the situations in which these rules operate. The Government's concern is that small limited companies are being used to disguise employment, so this is the test which has been applied:-

Where the employee is provided by his Company to an ultimate client on terms which would normally constitute an employment with that client, this is called a relevant engagement and the IR35 rules apply.

Relevant engagements

Where the Company provides the services of a member of staff to a client (either through an agency arrangement or otherwise) and the terms are such that, without the intermediary the individual would be an employee of that client, the IR35 tax treatment is triggered.

It is important to remember, therefore, that it is a test of employment as regards the eventual client that is considered. We are not then saying that the individual is an employee of the client, just that in these circumstances the "relevant engagement" rules will apply.

Income from such work arising from a relevant engagement will be taxed according to the IR35 rules. Clearly, therefore, the planning considerations will depend on the correct classification of the engagement by the Company. Read more on the IR35 employment status here.

Where can I find out more?

Our IR35 resources section gives far more detail, together with expert articles, summary, the latest case law development and OTS's review of IR35 for 2011.