💥 What is IR35? Does it affect You? 💥

The IR35 legislation applies to contract workers who operate as a limited company, working for a third party to provide specialist services to the client that they are working for at any one time. HMRC will look at each individual’s contract and their workspace, to determine whether or not they are inside or outside IR35. That’s because contractors who set up and work through a limited company enjoy some tax efficiency. While they don’t usually get employee benefits (like holiday and sick pay), they have flexibility and control over their work.

Some contractors try to take advantage of this tax efficiency by appearing self-employed on the surface, when they’d actually be an employee were they not providing their services through their limited company.

HMRC are undertaking investigations on such individuals, to discover whether they are using the fact that they are working under a limited company to avoid paying higher tax and national insurance. If such individuals are found to have been avoiding tax, they will have to pay the owed monies to HMRC. The new rules now state that any money that the employer hasn’t paid in terms of national insurance will also be claimed back by HMRC.

HMRC goes on to say that the off-payroll rules apply if the contractor “would be an employee if there was no intermediary”. The intermediary in many cases is the contractor’s limited company (often called a personal service company).

What is an intermediary ❓

IR35 is also known as the ‘intermediaries legislation’ because it applies to workers who provide their services through an intermediary, rather than working as an employee.

As mentioned, the intermediary will often be the contractor’s own limited company, or personal service company.

A personal service company is a limited company where the sole director, the contractor, owns most or all of the shares. The contractor then delivers services to clients.

But gov.uk says that there can be other intermediaries:

✔️ a partnership

✔️ another personal service company

✔️ an individual.

A contractor can provide their services directly to clients through their intermediary, or they might work through an agency or umbrella company.

What does it mean to be inside IR35 ❓

HMRC introduced the off-payroll working rules (IR35) in 2000. If you are found to fall inside IR35, you are expected to pay the same amount of tax and national insurance that a permanent employee would pay. You are subject to PAYE and National Insurance Contributions and should have the correct funds deducted from your pay each month. Similarly, your end-user client should also be matching the national insurance paid to the government, and therefore, you will both be held accountable if these funds have been paid incorrectly.

Within the public sector, the agency or hiring body will deduct national insurance and income tax from your pay cheque each month. On the other hand, if you work in the private sector, as per the off-payroll rules, your employer is expected to determine whether or not their team members should be deemed as being inside IR35. If they do not provide the correct information to HMRC, they are likely to be billed the monies owed to HMRC.

What does it mean to be outside IR35 ❓

If you are working outside IR35, you are operating legitimately as a contractor and are being paid by your limited company and doing so outside of the IR35 rules. This could involve working on defined projects (rather than rolling contracts), actively marketing your business’s services, and working for more than one client. To be outside IR35, your contract must reflect you and your client’s actual working practices, so you aren’t caught out by HMRC. Your contract is likely to include details of the services you will be providing, and when and where you will be working. But it will not include demands from the client’s point of view, such as performance monitoring and appraisals.

If you offer services, rather than a contract for a service, then you are likely to fall outside of IR35 as you could send someone to do the work in your place, for example.

You will have the responsibility of ensuring that you are paying the right amount of national insurance and tax on the money that you receive for your work. You are not subject to PAYE by the contracted employer.

Your IR35 status has different implications for the tax you pay.

When you are inside IR35 you:

👉  are classed as an employee for tax purposes

👉  need to pay income tax and National Insurance Contributions

👉  pay this tax by making a ‘deemed payment’ at the end of the tax year.

Working out your deemed payment can be complex, so it is best to speak to your accountant to make sure you get it right. But if you are a public sector contractor, your fee payer will work out and pay your tax and NICs on your behalf (this applies to those in the private sector from April 2021 too).

Even though HMRC sees you as an employee for tax purposes when you are inside IR35, you are not entitled to employee benefits like holiday pay and sick pay.

When you are outside IR35 you:

👉  are self-employed and operate as a proper business

👉  are responsible for your business’s taxes

👉  can pay yourself in a tax-efficient way.

If you are outside IR35 you will be paid your fee and will be responsible for managing your business’s taxes as normal.

What does IR35 status depend on ❓

IR35 status tests usually relate to supervision, direction and control.

But in reality, IR35 status hinges on IR35 case law and employment legislation, itself reliant on decades worth of employment tests heard in UK courts.

Who works out IR35 status ❓

If you contract with a public authority, they are responsible for working out whether you fall inside or outside of IR35. If you fall inside, the hirer, agency or other third party who pays you then needs to deduct tax and NICs and report them to HMRC.

If you contract with larger businesses, they are responsible for working out your IR35 status. As above, the party who pays you then needs to deduct tax and NICs.

Smaller businesses are exempt, which means it remains your responsibility to determine your IR35 status when working for them.

End clients are classed as small businesses if they meet two of the following criteria, for two consecutive financial years:

✔️ annual turnover of no more than £10.2 million

✔️ balance sheet total of no more than £5.1 million

✔️ no more than 50 employees.

IR35 rules: are you compliant ❓

For clarification, HMRC has developed an online employment status tool (CEST) for contractors unsure of their liability under IR35. If you are receiving the same rights as that of a permanent employee, for example, holiday entitlement, sick pay, or if you are receiving certain benefits, you will likely be deemed as inside IR35.

HMRC uses the following factors to test your IR35 eligibility:

1. Substitution

For a contract to fall outside IR35, you should be able to send a substitute to complete the work instead.

✔️ does your client only want you, or services more broadly? An outside IR35 contract might state that someone else can provide their services to complete the work

✔️ the clause has to be genuine – you should know which skilled contractors you would ask

✔️ plus the contract can’t be so restrictive that you essentially need to do the work yourself.

2.  Supervision, Direction, Control

For a contract to fall outside IR35, contractors should have freedom over how they complete their work. If your employer controls your workload and the way in which it is carried out, it suggests you are inside IR35 as you are not deemed as providing a specialist service.

✔️ a contract that specifies things like the time you can start and finish work, or the days you are required to work, points towards employment

✔️ a contract might also point towards employment if a client oversees your work excessively and gives guidance on how to complete it

✔️ plus, if you are not only providing your services for the agreed job but also working on different tasks as your client sees fit, the contract is likely to be inside IR35.

3. Mutuality of obligation (MOO)

If both parties pass the above tests, it is unlikely that MOO applies as it will be deemed outside IR35 anyway. MOO can be present in both contracts of service and contract for service. This is an important clause in a contract, as it is a key test when working out self-employed status. If the client is obliged to offer work (and pay you) and you are obliged to take it, this demonstrates a contract of employment.

✔️ in practice, this means a self-employed contract involves working on a project-by-project basis

✔️ once you have completed a project, you are under no obligation to work on further tasks (and the client is under no obligation to offer them)

✔️ you should also consider whether you can work for other clients simultaneously. If that is prohibited, it points towards employment.

4. Risk –If a contractor can make a profit or a loss i.e. financial risk this would suggest that the contractor is outside IR35.

Other IR35 criteria

There are more criteria to consider when working out IR35 status:

👉 equipment – HMRC often tries to argue that if the client provides equipment, and you don’t use your own, you’re a disguised employee

👉 financial risk – self-employed contractors usually take a degree of financial risk, like any other business. Are you responsible for errors made during the contract, and would you need to rectify them in your own time? There is usually a requirement to have professional indemnity insurance

👉 the way you are paid – self-employed people are paid on a project basis, which might mean when the work is completed or at particular project milestones

👉 ‘part and parcel’ of the organisation – if contractors become so ingrained that they become part of a company’s structure, with people reporting to them for example, this points to employment rather than self-employment

👉 exclusivity – do you work for other clients? Typically the self-employed can work for multiple clients at once

👉 intentions of the parties – the contract should make sure the relationship between contractor and client is one of supplier and customer, but this should be genuine. If HMRC found the actual intended relationship is more like an employee and employer, it will ignore the contract

👉 business ‘on your own account’ – essentially this determines whether you are actually running your business as a business. If you have things like a business website, a dedicated office space, and even employees, you could be seen as operating a business and not offering your services in the same way as an employee

Make sure you clarify your relationship with the hirer before you start the contract by considering all of these principles.

Before you start working, you should seek expert IR35 advice.

Should I avoid inside IR35 contracts ❓

You can continue to run your limited company even when a contract is inside IR35.

📌Negotiating outside IR35 contracts

It is important to negotiate carefully and make sure you are clear from the beginning if you are contracting outside IR35. You should:

✔️ align your working practices with your contract

✔️ ask an expert to review your contract

✔️ keep a compliance file.

IR35 contract review services

An IR35 contract review service can be useful for checking that your contract accurately reflects your working practices. They will help make sure you are compliant with the changes and determine if you fall inside IR35 or outside IR35.

Expert review services can also provide a pass/fail test result as well as a detailed report on how to be outside IR35, depending on how much you want to spend.

What about existing contracts ❓

If you are making changes to an existing agreement, you should keep a record of decisions made for compliance. It is a good idea to have your client sign a document –or a new contract – confirming these changes in case HMRC decide to investigate.

📌Being inside IR35 means your contract falls in the off-payroll working rules and HMRC sees you as an employee for tax purposes. Being outside IR35 means your contract points towards self-employment, so you can operate tax efficiently.

I is perfectly possible for professional contractors to have a mix of contracts both inside and outside of IR35 – but it means you’ll need to be organised and ask for professional advice, if you need it.

End of article.