http://www.hmrc.gov.uk/ir35/responsibilities.htm
HMRC seeks to ensure that, where the underlying nature of an individual’s contract is one of employment, tax and NIC should be paid at employed levels, even if the individual is working through a limited company.
The Government has imposed a whole raft of tax and employment legislation that contract workers are expected to understand and act in accordance with. The IR35 legislation is applied in different ways to different professions depending upon how the contract worker renders their services to the client/hirer. IR35 was the reference number given to a press release on Budget Day 1999 first announcing the intention of the Government to introduce new rules affecting contract workers who rendered their services through a limited company, often referred to as a personal service company or an intermediary company. The Intermediaries Legislation (IR35) came into effect on 6th April 2000. The Government introduced the legislation in order to combat the increasing number of contract workers who set up a limited company and paid their taxes as “self-employed” when their working arrangements pointed to the fact that they were employees. In this way they avoided paying the correct level of income tax and NI contributions and increased their net earnings. HMRC refer to these contract workers as “disguised employees”.
Each assignment or relevant engagement undertaken by a contract worker has to be assessed to determine whether the employment status would be considered by HMRC to be one of “self-employment” or “employment”. This is commonly referred to as the employment status test. A contract worker’s employment status is not a matter of choice. Whether someone is employed or self-employed depends upon the terms and conditions of the relevant engagement usually laid down in a contract for services and the actual working practices. It is important to know whether you are working for the client/hirer in an employed capacity or in a self-employed capacity as an independent contractor. HMRC’s website categorically states that it is the engager’s responsibility to correctly determine the employment status of workers www.hmrc.gov.uk/employment-status/index.htm. However in our experience HMRC's first point of call to recover any underpayment of tax and NIC is from the contract worker's limited company and not from the engager. Therefore one’s employment status determines the liability for income tax and NI contributions that are required to be paid to HMRC. HMRC refer to genuine self-employment as being “outside IR35” and employment as “caught by IR35”.
1. Contract Review Your employment business or client/hirer will forward to you a copy of the contract for services that they wish you to sign. We recommend, prior to you signing this agreement, that you use the services of a specialist tax consultancy who will review the contract to ensure that the terms and conditions set out are properly drafted and accurately reflect the working relationship.
e-solo includes a review of contract terms and conditions and working arrangements (this typically costs £100) through leading tax compliance specialists Qdos Consulting Ltd., to help clearly establish employment status and to comply with the IR35 legislation.