Introduction

If you haven’t heard of IR35 and Composite Companies (MSCs before now), you soon will.

IR35 is the term used for Government legislation that was introduced to differentiate genuine contractors from those who were ‘akin to employed’.

Despite what other people may tell you, there is no grey area with IR35 – you will either be one or the other: a genuine contractor or ‘akin to employed’.

If you pass the IR35 test, the Inland Revenue consider you to be a genuine contractor and you can continue to pay yourself a small salary and take the rest of your income in the form of dividends, which do not incur national insurance contributions.

But fail the IR35 test and the dividend income route is closed to you, with a reduction of approximately 8%-15% on your net income.

The IR35 legislation affects all contractors, irrespective of the industry you work in.

Part of the IR35 test involves answering such questions as:

• Do you have more than one client?
• Do you provide your own materials on site?
• Is your contract project based with deliverables and milestones?
• Do you have the right to substitution?
• Are you taking any financial risk? (i.e. will you only be paid once you have met agreed goals, and this will remain the same, regardless if your time spent on a project takes longer than originally stated).
• Are you under any direct control and supervision?
• Is there mutuality of obligation?

If you pass the IR35 test, then maybe setting up a limited company is for you. 3Sxity, since August 2007, do not offer a Limited Company Service. We would recommend logging into ICAEW and choose a reputable firm to take care of your affairs.