Do you provide your personal services to an end client through a limited company?
If the answer is yes, then you’ll need to ensure you act in a way which doesn’t look
to HMRC like an employer and employee relationship.
Why is this so important for contractors using a limited company? Well, if HMRC
deems you to be working as an employee, rather than working through a business
– the amount you pay in tax differs. HMRC wants to make sure the tax you pay
accurately reflects your employment status. These rules are enforced by HMRC
through ‘intermediaries legislation’, also known as ‘IR35’.
IR35 is notoriously complicated to grasp and, when trying to wrap your head around
this complex legislation, online information and even HMRC’s own guidance can
often be more confusing than helpful.
This guide will explain IR35 in simple terms, and provide a few scenarios to better
equip you to understand if you’re paying tax correctly.
What is IR35 and
why it is important?
A very brief history – IR35 was introduced in the year 2000 to address the problem of
people working through personal service companies to avoid paying employment
Through a limited company, you are able to split any Income Tax and National
Insurance Contributions (NICs) due between a low salary and high dividends –
thereby securing a higher take home pay than an employee.
If IR35 applies to your contract, it means you pay the same Income Tax and
National Insurance Contributions (NICs) as you would if employed directly rather
than contracted to work through your limited company.
The financial impact of IR35 can be significant. You may find your future earnings
are reduced and HMRC may ask you to pay Income Tax and NICs it calculates is
due from prior years.
IR35 regulations are there to determine if the relationship between you (as the
worker) and the end client would be seen as an employer/employee relationship,
if the agency you work for and/or your limited company wasn’t in place. Breaking
it down: IR35 determines if you’re an employee of the client or whether your
limited company is providing services to that client.
Here are a couple of terms you’ll need to know:
Personal Service Company
A company that sells the work or services of an individual (or group of individuals)
that is owned and operated by that individual (or group of individuals).
The entity that sits between the end client and the worker, such as the agency or
Am I an employee
or a contractor?
You might imagine this would be a fairly straightforward process. You may think
that because you have a limited company and the work isn’t permanent, you’re
therefore a contractor. Well, unfortunately, it isn’t that black and white, and there’s
a variety of questions you should ask to establish your employment status.
It’s important to remember that IR35 is designed to cover a large number of
scenarios. There is no single situation to prove IR35 rules apply or not. What is
important is that the contract between your limited company and the agency or
end client, and the actual working practices you follow, mean you should not be
regarded as an employee of the end client you are providing services to.
HMRC are becoming increasingly tough with regards to IR35 enforcement. In
the public sector, they introduced changes in 2017 that put the responsibility on the end client (or agency) to determine the IR35 status of people providing
services via limited companies. This has led to an increase in the number of
contracts deemed to be “inside IR35” in the Public Sector and an increase in the
amount of employment tax paid to HMRC. This makes it even more important
to evidence that you’re not an employee of your end client and that you are
working legitimately as a contractor through your limited company.
The first thing to consider when approaching IR35 is whether your work is
controlled and directed by you, or if you are subject to an employer/employee
Factors that affect
your IR35 status
How do I know if IR35 rules apply to my
Determining whether IR35 applies or not is complex and must be considered at
the individual contract level. HMRC will also look ‘behind’ the contract and at the
actual working practices being followed – so it’s not just a ‘paper exercise’. You
should seek specialist advice (Crunch can provide this service). However there are
three key principles that will help determine your IR35 status:
What degree of control does your client have over what, how, when and where
you complete the work?
As a contractor, it’s likely that you’ll work to a comprehensive job specification.
This specification would outline:
• The services to be provided
• Where the services are provided
• The hours in each day over which the services are provided
However, the contract may go further and say that you must submit to management
guidance, appraisal or monitoring. This is an indicator your work is being controlled
and that you’re an employee, not a contractor.
Are you required to carry out the work yourself, or can you send someone else in
If you have to provide your services personally, this is usually an indicator that
you’re an employee. A contractor, on the other hand, could send a substitute to
complete the work on their behalf. A contractor could also reassign the work.
However, the right to send a substitute must be absolute and not restricted to
such an extent that you have to perform the work yourself.
Mutuality of obligation
Does the contract oblige your client to offer you work throughout the contract period,and are you obliged to personally do the work? When the contract period
ends, is there an obligation on the end client to offer you further work and extend
To qualify as a contractor, there must not be any ‘mutuality of obligation’. There
are three obligations to consider:
• An obligation for one party to offer other work within the assignment.
• The worker has an obligation to complete a notice period, that would of
similar length to if they were an employee.
• If work is offered, an obligation for the other party to accept it.
Put simply, a contractor must work on a project to project basis, with no obligation
to carry on working for the client after the project has been completed. A
contractor also has the right to terminate a project part way through. To qualify
as a contractor, make sure these apply to you and that there is no ‘mutuality of
Regardless of the sector you work in, these three key principles remain the same.
If you can clearly show that any one of these principles does not apply, you
should not be affected by IR35. This is because the relationship with your client
will be seen as a contract for services, rather than a contract of employment. For
example, if a worker can send a substitute in their place, personal service is not
required and IR35 does not apply.
Other factors to consider
As well as the three key areas highlighted above, you also need to be aware of
some additional factors.
Financial records: A contractor will receive payment when work is completed,
while an employee will usually be paid at regular intervals.
Alternative work: If you’re contractually obliged to have one client at a time,
you’re probably an employee, not a contractor.