What are IR35 Rules

IR35 Rules and Advice For Contractors To Avoid IR35

Finance Act 2000:

The IR35 rules are set out in the Schedule 12 of the Finance Act 2000.
The basic details are –

(a) an individual ("the worker") personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ("the client")
(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party ("the intermediary") and
(c) the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.

The reference in paragraph (b) to a "third party" includes a partnership or unincorporated body of which the worker is a member.

The circumstances referred to in paragraph (c) include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided.

The impact of the rules if they apply

In the case of an engagement to which the rules apply, for any payment made to the worker that is not chargeable to tax under PAYE (such as dividend income), the intermediary will be treated as making to the worker, and the worker will be treated as receiving, a payment chargeable to income tax under Schedule E and this is called the "the deemed Schedule E payment".

Calculating the deemed Schedule E payment

Step 1: Find the total amount of all payments and other benefits received by the intermediary in that year in respect of the relevant engagements, and reduce that amount by 5%.

Step 2: Add the amount of any payments and other benefits received by the worker in that year in respect of the relevant engagements, otherwise than from the intermediary, that are not chargeable to income tax under Schedule E, and would be so chargeable if the worker were employed by the client.

Step 3: Deduct the amount of any expenses met in that year by the intermediary that would have been deductible from the emoluments of the employment if the worker had been employed by the client and the expenses had been met by the worker out of those emoluments.

Step 4: Deduct the amount of any capital allowances in respect of expenditure incurred by the intermediary that could have been claimed by the worker under section 27 of the Capital Allowances Act 1990 (plant and machinery: extension of allowances to employments etc.) if the worker had been employed by the client and had incurred the expenditure.

Step 5: Deduct any contributions made in that year for the benefit of the worker by the intermediary to a scheme approved under Chapter I or Chapter IV of Part XIV of the Taxes Act 1988 that if made by an employer for the benefit of an employee would not be chargeable to income tax as income of the employee.

Step 6: Deduct the amount of any employer's national insurance contributions paid by the intermediary for that year in respect of the worker.

Step 7: Deduct the amount of any payments or other benefits received in that year by the worker from the intermediary in respect of which the worker is chargeable to income tax under Schedule E, and which do not represent items in respect of which a deduction was made under Step Three.

If the result at this point is nil or a negative amount – there is no deemed Schedule E payment.

Step 8: Find the amount that together with employer's national insurance contributions on it is equal to the amount resulting from Step Seven. The result is the amount of the deemed Schedule E payment.

Responsibility for the deemed Schedule E payment