What is IR35 and does it apply to you?
IR35 describes two sets of legislation that HMRC has designed to combat what they consider to be tax avoidance by workers and the firms hiring them. HMRC maintains that these workers supplying their services to clients via an intermediary such as a limited company, are actually employees and so should be taxed as such.
This article will discuss IR35, the imminent changes and what you should be doing to prepare for them.
What is IR35?
Contractors who work through their limited companies enjoy a level of tax efficiency. They don’t usually get employee benefits and they have flexibility and control over their work. IR35 rules require the individual and the contracting company, to assess whether the individual working through a limited company, is a genuine contractor as opposed to a ‘disguised’ employee for the purposes of paying tax.
HMRC introduced IR35 (or the ‘off-payroll working rules’) in 2000 to tackle to assess whether contractors are essentially employees when they take on work for clients.
When does IR35 apply?
HMRC says that when determining whether IR35 applies to a contract or engagement, “you must work out the employment status of the person providing their services.”
The guidance also states 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 sometimes named a personal service company. A personal service company is a limited company where the sole director, the contractor, owns most or all of the shares.
Other intermediaries include:
- a partnership
- another personal service company
- an individual
A contractor can provide their services directly to clients through their intermediary, or they might work with an agency.
IR35 checklist – do I qualify?
In general, IR35 won’t apply if the contract is for services rather than employment. To untangle that, you should see whether the contract specifically mentions these principles:
- supervision, direction, control– this relates to how much say your client has over how you complete your work. For example, if you have to work at certain times, this implies employment
- substitution– could you bring someone else in to complete the contract, or do you need to do the work yourself? If you can’t send someone else, you might be caught by IR35
- mutuality of obligation– is there an obligation on the client to offer work, and do you have to accept it? This is called mutuality of obligation, and if an element of it exists, the contract may fall inside IR35.
Other factors may include:
- Equipment – if you use equipment provided by the client, HMRC will try to argue that you’re a disguised employee
- How you’re paid – if you’re self-employed you are usually paid on a project basis.
- Exclusivity – Typically you would be carrying out work for other clients
- Business ‘on your own account’ – are you 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
Responsibility in public and private sectors
There are currently different rules for public sector and private sector contracts:
- Public sector –the hirer is responsible for working out whether the contractor falls inside or outside of IR35. If they fall inside, the hirer, agency or other third party who pays the contractor then needs to deduct tax and NICs and report them to HMRC
- Private sector contracts – the contractor is responsible for working out whether they fall inside or outside of IR35. If they’re inside, they need to pay the tax and NICs due.
Do you need advice on whether this is applicable to your situation? Or how to calculate deemed payments?
Please get in touch with your Swindells’ partner if you think this might apply to you and we haven’t already discussed this with you.
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