Q: I formed a limited company with a no. of small clients. I’m negotiating with a potential client about them using me 12 days a month. This leaves 8 days for other client work. Could I still be within IR35 despite having multiple clients and working from my own office?
Oct 16 2008
Answered by: Clive Lewis Ask a question
Yes you could still be in an “IR35” situation if you own more than 5 per cent of the shares in the company.
For example, many IT consultants are forced to form limited companies to qualify for contracts from large businesses. Basically, IR35 was introduced by the government to prevent individuals from forming a company as a vehicle to receive income as a means of avoiding Income Tax or National Insurance Contributions.
It applies where a single worker’s (“the contractor”) services are provided to a client through a limited company (in which the worker has more than a 5 per cent share) where in other circumstances the worker would be an employee of the client.
HMRC's expects the income of the company (called “Service Companies”) to be treated as income of an individual.
There are a number of relevant Tax Bulletins and Booklets available from HM Revenue and Customs at : www.hmrc.gov.uk/ir35/
But it is more likely that the issue for you is whether the HMRC regard you as an employee of the potential client rather than being self employed. If you are self employed you are entitled to deduct expenses “wholly and necessarily incurred” in the business. But as an employee you will not be allowed to deduct expenses and your earnings will be subject to PAYE (Income Tax) and National Insurance contributions. A guide to employment status for tax and National Insurance contributions is on the HMRC website at: http://www.hmrc.gov.uk/employment-status/index.htm#1
Each case has to be examined on its merits. As a general guide as to whether a worker is an employee or self-employed; if the answer is 'Yes' to all of the following questions, then the worker is probably an employee:
• Do they have to do the work themselves?
• Can someone tell them at any time what to do, where to carry out the work or when and how to do it?
• Can they work a set amount of hours?
• Can someone move them from task to task?
• Are they paid by the hour, week, or month?
• Can they get overtime pay or bonus payment?
If the answer is 'Yes' to all of the following questions, it will usually mean that the worker is self-employed:
• Can they hire someone to do the work or engage helpers at their own expense?
• Do they risk their own money?
• Do they provide the main items of equipment they need to do their job, not just the small tools that many employees provide for themselves?
• Do they agree to do a job for a fixed price regardless of how long the job may take?
• Can they decide what work to do, how and when to do the work and where to provide the services?
• Do they regularly work for a number of different people?
• Do they have to correct unsatisfactory work in their own time and at their own expense?
All the above questions are important, but the one that often causes the HMRC decision to go in favour of employment is the the first point concerning whether the contract allows the person to engage helpers at their own expense.
If you have any doubt you should seek the advise of a chartered accountant experienced in IR35 and employment / self employment issues.
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