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HMRC Publishes Guidance on Risk-Based Approach to IR35

HMRC takes a stringent approach to the taxation of individuals who supply their services to businesses through the use of an intermediary company. If an individual supplies their services through such an intermediary, precaution should be taken to ensure they do not fall foul of rule IR35.

IR35 was introduced to prevent individuals from avoiding being classed as employees by trading through intermediaries and therefore avoiding having to pay employee income tax and national insurance contributions. If, upon inspection, it becomes apparent that, in the absence of an intermediary company, there would be an employment relationship, IR35 enables HMRC to claim back the employee income tax and national insurance contributions which should have been paid, giving credit for what other income tax has been paid. HMRC can claim back as far as 6 years, meaning that if an individual falls foul of IR35, it is potentially very costly. HMRC would also be able to claim back up to 6 years worth of employer’s national insurance contributions from the intermediary company, plus interest/penalties for the delayed payment.

HMRC has now published guidelines on the risk-based approach it will take to an individual’s compliance with IR35. The guidelines contain business entity tests and points are allocated for each test, with higher scores meaning an individual is low-risk (20 points or over) and lower scores meaning they will be classed as high-risk. If an individual can show they are either outside IR35 or in the low-risk category, any IR35 review in place will be closed and there will be no further reviews for 3 years. This provides useful guidance on the factors HMRC are likely to consider when determining whether IR35 applies or not. The guidelines can be found at this link: http://www.hmrc.gov.uk/ir35/guidance.pdf

Lanyon Bowdler is able to draft service agreements which should minimise the risk of IR35 applying, provided such agreements reflect the reality of the relationship.