What is IR35? HMRC ruling confirms no one is immune from the legislation

What Is IR35 legislation?

Many people misunderstand the application of IR35. Some believe that it only relates to contracts of certain lengths, and others believe they have water-tight contracts that absolutely prove an engagement isn’t within IR35. The reality is, there is no such thing as ‘IR35-proof’ contracts and the legislation is applied on a per engagement basis, regardless of its length.

This latest high-profile case featured a typical service company setup, where the worker set up her own company through which she engaged with the customer, rather than becoming a direct employee. Importantly in this case, the tribunal confirmed that there is nothing wrong with such an arrangement – it’s perfectly legitimate – however, the setup falls well within the trap of IR35 and, for private sector engagements, it is the service-provider’s duty to assess their liability to IR35.

IR35 was designed to catch those arrangements whereby an individual who would otherwise be treated as an employee is gaining a tax advantage by using an intermediary such as a service company. The legislation itself isn’t particularly punitive – it seeks only to redress the situation so that no tax advantage is achieved and the parties involved pay the equivalent to employment taxes.

This ruling isn’t particularly ground-breaking and HMRC were in no way daring to push the boundaries of the legislation. But, if nothing else, it should put to bed some of the typical misunderstandings about IR35 and confirms that the facts of each separate case will determine the application of IR35. Regardless of what you may hear, it is the practical working arrangements that will decide whether or not IR35 should be applied, not the legal contract provisions. It’s also important to remember that these rules don’t only relate to certain industries.

From 6 April 2017, the duty to asses an engagement’s liability to IR35 moved from service provider to customer when public authorities use off-payroll entities. That means that anyone working for a public authority can expect to see income tax and national insurance deductions being applied to their payments, as many public bodies are erring on the side of caution and applying a blanket ruling to external company contractors. Relief can then be claimed for the tax suffered against drawings made from the intermediary by the service provider, but these rules can be complex and mistakes will be costly.

For now, private sector engagements continue to be subject to self-assessment through the intermediary’s corporation tax return, but it’s widely believed that the public sector rules will soon be applied.

We recommend that anyone providing services through an intermediary, whether to public or private sector customers, seeks professional advice without delay. At Walpole Dunn we have experience in assessing engagements against the IR35 legislation and successfully challenging incorrect HMRC rulings. If you would like help with your intermediary arrangements, contact us today.