Who is caught by these rules?

The IR35 rules aim to catch anyone who, by placing an intermediary between himself and his employer, gains some tax (including NIC) advantage.

Personal service companies

The example most frequently quoted is the consultant who, rather than working under a direct contract with a customer, contracts his services through his one-man company. Such a company has become known as a personal service company - a company which exists to provide the services of one or more particular individuals. The test for IR35 is whether, ignoring the existence of the company, the contract as it operates between the customer and the consultant is one which would lead to the consultant being classified as an employee of the customer, rather than self-employed. If the answer is that the consultant would, indeed, be classified as an employee, then IR35 applies. If he would be classified as self-employed, it does not.

If you operate your business through a personal service company, IR35 will normally only apply to you if:

• More than 5% of the ordinary share capital of the company is owned by you or your family, or
• You or your family are entitled to more than 5% of any dividends the company pays, or
• You are in a position to be able to receive payments or benefits from the company which are not salary e.g. not earnings to which PAYE is applied, but which represent payment for the services you provide to relevant clients.

Partnerships

Another example is a member of a partnership - self-employed - who is contracted by the partnership to a client under terms that would amount to an employment if the contract had been directly between the partner and the client.

HMRC have in the past quoted the example of a vet in a large veterinary practice who is contracted to work by the local zoo for set hours per week. In this example, it is the services of one particular partner which are contracted, and as such, IR35 would apply.

But if the zoo had instead contracted for the practice to provide any vet of suitable qualification and experience, it is unlikely the contract would be caught by IR35.

Again, there are restrictions on cases where IR35 will apply. For those providing their services through a partnership, the rules will broadly not apply unless:

• You and / or your family are entitled to at least 60% of the profits of the partnership, or
• Work for one client generates all or most of the partnership's income, or
• Your profit share reflects the payments received for your services to clients in circumstances where the IR35 rules apply.