iCalculator

IR35 calculators with IR35 risk calculation

IR35 Calculators

Not sure whether you fall Inside or Outside of IR35? Use our online IR35 calculator.

An introduction to IR35

IR35 (InZtermediaries Legislation number 35) is legislation, first introduced in April 2000, that aims to eliminate tax avoidance and National Insurance Contributions (NICs) avoidance through the use of intermediaries, such as Personal Service Companies or partnerships. IR35 is focused on workers who:

  • Could be regarded as an employee of the client for tax accounting purposes.
  • Could be regarded as an employee in employed earner's employment by the client for NIC purposes.

in HMRC's eyes, the key to IR35 is the relationship between the client and the worker. If the relationship is seen to be the same, then HMRC believes that tax and NIC's should be collection in the same manner as a traditional employee, as though employed directly through the company.

How does this work with contracting? Contractors typically provide a specialist skill to augment a companies capability for a short period. This could be to support a project, to trial a new capability, to install technology systems or machinery etc. In these instances, the contractor is providing a service to one ltd company (the client) that would typically be provided by another ltd company (the contractor).

HMRC love Contractors who form their own limited companies as it makes it very clean cut for them to understand the relationship, it's a traditional business model. Some contractors however don't want to form their own limited company, reasons include:

  • They don't know if contracting is what they want to do long term
  • They don't want the cost or perceived hassle of running a limited company
  • They are worried about the responsibilities of running a limited company
  • They cannot run a limited company for legal reasons

Due to the contractors preference and the clients desire for a temporary workforce, umbrella companies were borne. Umbrella Companies employee the contractors in order to provide accounting a payroll services to the contractors and enable them to work for the client without any of the tax, accounting and HMRC responsibilities associated with running a limited company.

Unfortunately, some umbrella companies became involved in bad practices:

  • Allowing contractors to claim more expenses that were actually incurred
  • Submitting false figures to HMRC
  • Moving money offshore and operating a loan scheme which meant the contractor wasn't paid, they were repaying a loan

These bad practices led to HMRC tightening up legislation and getting tougher with the industry. This has led to a number of good and bad decisions, the latest complexity is in terms of 'direction and Control'. Contractors who use an umbrella company typically never see the umbrella company, they just use them for the service. Although employed by the umbrella, they don't work for them. They complete work as strategically directed and controlled by the end client (as a contractor who works for their own limited company does).

There are many examples of challenges within the umbrella company industry but there are three key points for you to take away:

  • HMRC does not like umbrella companies due to the historical issues and because they make it easier for contractors to take contracts and legally pay less tax that a traditional PAYE employee
  • If you do decide to use an umbrella company, choose a reputable umbrella company with a good reputation and track record.
  • If you are serious about contracting, set up your own limited company. You will earn more, it is less controversial with HMRC and less hassle due to the constant challenges to umbrella companies created by HMRC. Setting up your own limited company will cost a lot less than you think, choose a good accountancy firm like Accounts Direct and they will set up and file your returns for you and advise you relevant tax advice.

Am I 'Inside' or 'Outside' IR35?

This is the most important question a contractor should ask themselves. When IR35 was introduced it was a typically poor planned and conceived HMRC initiative creating more grays than black and white clear cut lines for accountants and contractors to follow.

The resulting confusion over IR35 and it's interpretation resulted in a number of courts cases. These legal cases have provided the framework for an IR35 means test which helps to define whether a contractor is Inside or Outside of IR35 legislation. The IR35 means test was further galvanized in May 2012 when HMRC updated the tests, taking a risk based approach.

IR35 tests are now used by intermediaries (like umbrella companies) to assess whether HMRC would view the contractor as an employee of the end client. iCalculator have provided an online IR35 Status calculator which you can use to confirm whether you fall inside or outside of IR35.

How does IR35 affect me?

  • If you fall Inside IR35: Your earnings are subject to PAYE, income tax and national insurance contributions deductions must be made from your earnings.
  • If you fall Outside IR35: You can take dividend payments from your company that are not subject to national insurance contributions. Note that you must operate your own limited company and NOT use an intermediary (like an umbrella company) in order to receive dividend payments.

IR35 Status calculator

The IR35 Status calculator refers to specific elements of the contract and the individual's working practices and provides a IR35 risk score which is recognized by HMRC. The IR35 risk score defines how likely HMRC are to review whether IR35 applies to you. The higher the risk, the more likely it is that IR35 applies to you and the more likely that HMRC will look at your payroll and accounts. The IR35 risk table is split into three categories:

  • Low Risk [Green]: There is a low risk that you are inside IR35 and a low risk of HMRC checking whether IR35 applies to you. So, very few or none of the key elements of the contract suggest that IR35 applies.
  • Medium Risk [Yellow]: There is a medium risk that you are inside IR35 and a medium risk of HMRC checking whether IR35 applies to you. Some areas of the contract suggest that IR35 may apply.
  • High Risk [Red]: There is a high risk that you are inside IR35 and a high risk of HMRC checking whether IR35 applies to you. There are several key areas of the contract that suggest IR35 applies.

IR35: Business Entity Tests

The IR35 status calculation looks at twelve specific business entity tests as defined by HMRC. These include:

  1. Business Premises:
  2. Professional Indemnity Insurance:
  3. Efficiency:
  4. Assistance:
  5. Advertising:
  6. Previous PAYE:
  7. Business Plan:
  8. Repair at own Expense:
  9. Client Risk:
  10. Billing:
  11. Right of Substitution:
  12. Actual Substitution:

IR35: Take the Test

Answer the following questions to receive a IR35 Risk score for your contract. The IR35 Guage above will alter as you answer the questions.

Business Premises

Q. Does your business own or rent business premises which are separate both from your home and from the end client's premises? For the purposes of this test, either you or your intermediary can own or rent a seperate busness premises..

Evidence required by HMRC
Professional Indemnity Insurance

Q. Do you need professional indemnity insurance (PII)?

Evidence required by HMRC
Efficiency

Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently?

Evidence required by HMRC
Assistance

Q. Does your business engage any workers who bring in at least 25% of your yearly turnover?

Evidence required by HMRC
Advertising

Q. Has your business spent over £1,200 on advertising in the last 12 months? (Excludes entertainment costs)

Evidence required by HMRC
Previous PAYE

Q. as the current end client engaged you on PAYE employment terms, within the 12 months which ended on the last 31 March with no major changes to your working arrangements?

Evidence required by HMRC
Business Plan

Q. Does your business have a business plan with a cash flow forecast which you update regularly AND a seperate business account?

Evidence required by HMRC
Repair at Own Expense

Q. Would your business have to bear the cost of having to put right any mistakes?

Evidence required by HMRC
Client Risk

Q. Has your business been unable to recover more than 10% of yearly turnover for work completed in the last 24 months?

Evidence required by HMRC
Billing

Q. Do you negotiate your own payment terms and invoice for completed work before being paid?

Evidence required by HMRC
Right of Substitution

Q. Does your business have the right to send a substitute worker?

Evidence required by HMRC
Actual Substitution

Q. Have you hired any full or part time employees or subcontracted any work that you have won tenders for?

Evidence required by HMRC
  • Details of end client
  • Employee/sub contractor details
  • Role description / employment contract
  • Recruitment responsabilties and details
  • Payment and payroll details
  • Payment audit trail