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What is IR35?

17th January 2011
By Alex Askew in Taxes
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If you have never been involved with contract work before, chances are you will never of heard of the tax legislation known as IR35. This legislation is aimed at preventing contractors taking advantage of the tax benefits associated with operating through their own personal company. This means people working via limited companies would be subject to the same levels of tax as 'normal employees', with the appropriate levels of income tax & national insurance.

What determines if you fall inside or outside of IR35?

Control- Is your work supervised by someone at the company you are working for or are you independent in the way you work? This is one of the main determinants of whether you fall inside or outside of IR35. So if you are behaving as a regular employee, with a high degree of supervision e.g. client can move the contractor from job to job due to changing priorities, then there will be a right of control over what is to be done and this is a strong indicator of employment being given and therefore being caught by IR35.

Right of substitution- This basically means if you were to fall ill, would you be able to bring someone else in to cover your workload? Usually if you are providing a business service rather than the service of an employee, your company should easily be able to find another temporary worker to take their place. If this is not the case than it is a strong indication of employment rather than operating a business to business service.

Mutuality of obligation- This basically means; is your client obliged to find you more work when your contract on the original project is finished. A contractor operating outside IR35 will do the work they have been contracted to do without expectation of been given further work from the client. This is a key factor in determining whether or not you fall outside IR35 & when the client is obliged to provide more paid work and the contractor is obliged to accept and complete the work, then you could be seen to be caught by IR35.

Above are only the three main determinants of whether you fall inside or outside of IR35. Since the introduction of the IR35 legislation in April 2000, it has become a highly controversial part of employment and tax law with many different factors influencing where you will fall, that only an expert can interpret properly. I would advise you to seek professional advice if you are at all unsure where you fall. Contractor umbrella calculator

More Information on IR35

Please see the Danbro
PAYE umbrella company ... IR35 guide for more information

For further details, please contact Danbro on: 01253 600141,
General Enquiries: 01253 600140,
London Office: 020 7836 8400 or
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