IR35 is an area that creates a lot of discussion and confusion among taxpayers and tax advisors and who it applies to. If you are self-employed or operating as an umbrella company, then you probably must have heard about the term “IR35.”
HMRC introduced the IR35 rules with effect from 6th April 2000. The measures were introduced to target workers in the IT industry who resigned from their jobs and started working as self-employed. However, their application is not limited to the IT industry but also applies to any worker who provides his or her services through a personal service company. This legislation came into existence so that the contractors pay the right amount of tax and National insurance.
So, instead of the worker paying PAYE and NIC and the client paying employer’s national insurance, the client makes the gross payment to the personal service company. The worker withdraws the profits from the company in the form of a small salary and dividends to pay some or no NI. Because as we all know, national Insurance is payable on dividends.
It is formulated to stop workers to avoid paying taxes, may be working through a limited company or to pay less tax, while they should directly be employed by the client who they are working for and paid by them directly. These workers are known as “disguised employers’ by the HMRC and if anyone is caught working this way they will be asked to pay tax and NI due which can lead to a substantial tax bill.
What is IR35?
The Government defines IR35 as, “off-payroll working through an intermediary.” The reforms to IR35 were introduced in April 2017. The Chancellor, Philip Hammond, confirmed these would be extended to the private sector in the Autumn Budget in 2018 but has been delayed until 2020.
Who qualifies for IR35?
Contractors who are using intermediary services but would be employees if they are providing their services directly to a company are affected by IR35.
The intermediary using these services could be a limited company or a personal service company, a partnership company or an individual. In case you need to prove someone is outside of IR35, a contractor needs to prove there is no employment relationship with you and your company.
Did you know? In 2017, a tool called the Check Employment Status for Tax (CEST) was introduced with reform to IR35. This tool helps to determine whether someone working falls inside or outside IR35.
Who falls outside IR35?
If the contractor is deemed as outside IR35, then they would be operating legitimately as a limited company. There are certain factors that determine whether the individual falls inside or outside IR35.
What degree of control does the client holds, and what, how, when and where the worker completes the work
It is personal service by the worker required, or can the worker send a substitute in their place?
Mutuality of obligation:
This is a concept where the employer is obliged to offer work, and the worker is then obligated to accept it.
The other factors may be:
- The equipment being used for a job
- Employee benefits including holiday entitlement, pension contributions, sick pay or maternity allowance also fall outside IR35 because they don’t generally apply to contractors.
- The financial risk factor is also a good indicator of whether someone is employed or self-employed.
Who falls inside the IR35?
This means that the contractor is subject to PAYE, and is expected to pay the correct amount of tax and NI that a permanent employee would have deducted from their pay cheque. If the contractor claims to fall outside IR35 and HMRC finds that they fall Inside of IR35, they could face a huge penalty charge to cover the unpaid tax.
IR35: Public Sector and Private Sector
How you will be affected by IR35 will also depend on whether you are Public sector or private sector. Those in the private sector are responsible for determining their own IR35 status (this is set to change). The Government has implemented changes to the legislation, mirror those affecting contractors working in the public sector, which will come into effect on April 2020. From the beginning of the 2020 tax year, whether you are working in the public or private sector as a freelance contractor, it will be the responsibility of your clients to determine whether or not you are affected by IR35. IR35 new legislation hits in April 2020. It is proposed that certain changes to the private sector will be made in 2020.
Criticism of IR35
Anthony Sherick, managing director of Contractor UK, says: “Bringing IR35 reforms to the private sector will have a negative impact on the UK economy.”
Well! Time will tell us.
If you are working as a contractor, it’s important to understand IR35 and whether you fall Inside or Outside IR35. There is a lot happening in off-payroll working and the only certainty is that changes will be introduced. Make sure you keep abreast of the changes and apply rules correctly.
For more help and guidance, feel free to contact us