At the 2018 Budget, the Chancellor announced that the ‘off-payroll’ rules will be rolled out to most private sector businesses from 6 April 2020. The only exclusion is ‘small business’ clients. We have created a handy guide below to help you navigate IR35 and what rules may apply to you or your business.
What is IR35?
A very brief history – IR35 was a set of tax rules introduced in the year 2000 to try and combat the problem of people avoiding employment tax by working through personal service companies.
If you operate as a limited company, you are able to have a higher take-home pay by taking a low salary and high dividends. This means that you will pay lower income tax and NICs. This means that a person can operate on a contract basis with a company rather than as an employee and be better off financially by operating through a personal service company. IR35 was brought in to try and solve this issue.
If IR35 applies to your contract, it means you pay the same Income Tax and National Insurance Contributions (NICs) as you would if employed directly rather than contracted to work through your limited company.
The financial impact of IR35 can be significant. You may find your future earnings are reduced and HMRC may ask you to pay Income Tax and NICs it calculates is due from prior years.
IR35 regulations are there to determine if the relationship between the worker and the end client is an employer/employee relationship or if you are a company providing a service.
Definitions of IR35 terms
Personal Service Company– A Company that sells the work or services of an individual (or group of individuals that is owned and operated by that individual (or group of individuals).
Intermediaries– The entity (Business) that sits between the end client and the worker, such as the agency or limited company.
Are you an employee or a contractor?
This isn’t always an easy question to answer. Under IR35 the mere fact that you operate as a limited company and you’re on a contract does not make this black and white. It must be considered on a client by client basis.
The onus for determining whether IR35 applies has been put on the end client (or agency). This has led to an increase in the number of contracts in the public sector being deemed as within IR35 and therefore have seen increased employment tax.
It is therefore important that anyone unsure about whether they are within IR35 to evidence that they are not an employee of the end client and that they are working legitimately as a contractor through their limited company. The first thing to consider is whether the work is controlled and directed by yourself or by the client. The latter would indicate an employer/employee relationship.
How do I know if IR35 rules apply to my contract?
Three key principles will help to determine IR35 status:
Control: – What degree of control does the client have over what, how, when and where any work is completed? There should not be a specification that states what, where and when the services should take place. This includes hours and location as this would indicate an employer/employee relationship.
Substitute: – As a business providing a service the contractor should be able to provide an alternative person or persons to complete the work on their behalf. If this is no accepted by the client then this would be considered to be within IR35.
Mutuality of Obligation: – A contractor should be able to work on a project by project basis, with no obligation to carry on working for the client after the project has been completed. A contractor also holds the right to terminate a project partway through. Again if this is not accepted by the client and they provide work by obligation at the end of the contract then this could be deemed as subject to IR35.
What other factors need to be considered?
Financial records: – A contractor will need to keep financial records that they receive payment when work is completed, rather than being paid at regular intervals like an employee would.
Alternative work: – If you have a contract that prevents you from working for more than one client at a time then you’re probably an employee, not a contractor.
Equipment: – You should be using your own equipment and should not be provided by the client.
Corporate involvement: – Small things that indicate you are part of the corporate structure such as having a security pass to the client’s building could be deemed to indicate you are an employee.
Blacklist: – You are able to check to see whether your client has had any IR35 problems previously
If you’re still not sure, you can use this tool on the HMRC website to check your status: https://www.gov.uk/guidance/check-employment-status-for-tax
Finally, our experienced team can provide you with information and advice about IR35, so if you have any queries then please contact us today.