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IR35 can sometimes be difficult to understand, and since its incorporation, it has been the source of a great deal of stress for countless contractors. From understanding what the rules entail and the consequences of being caught inside to what determining factors are used to assess IR35 status, there’s a lot to take in.
HMRC states that IR35 applies to you when you provide a service to a client via an intermediary. So what does that mean? In the case of a limited company contractor, the intermediary would be your limited company.
IR35 is complex, and many contractors can find themselves wondering just what the rules mean in practical terms. We’ve written this guide to help develop your understanding of the legislation and what it means for you.
A Managed Service Company (MSC) is a company that the contractor doesn’t really manage themselves, even if the contractor is appointed as the director and the shareholder. Instead, an MSC provider manages the majority of the company’s affairs rather than the contractor taking responsibility for them such as invoicing, banking along with day to day management of the company.
Prior to 2007, MSCs were an attractive way to work as they were not subject to IR35. However, since HMRC changed their legislation in 2007, the tax loopholes when using an MSC were closed.
According to HMRC, “you must receive or have rights entitling you to receive a payment or benefit that is not employment income”. In other words, you must get paid for the work as determined by your contract. You don’t get paid a salary, and your client does not issue you a monthly payslip with National Insurance or income tax deductions.
Control – are you managed by the client? Or do you have the freedom to work under your own control?
Financial risk – if a client fails to pay you, would you experience financial loss?
Substitution – can someone other than you perform the task your company has been contracted to do if you are unable to perform the contract?
The right of dismissal – can the client immediately terminate your contract?
Employee benefits – do you receive benefits such as holiday pay, sick pay, pension contributions, training courses, Christmas dinners or the annual staff summer outing? You can find more about HMRC’s determining factors in our comprehensive guide to IR35.
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