If you’ve been keeping up with the latest updates in the contracting world, you’ll know that IR35 is the main topic of conversation. But what is IR35, and what does it mean for contractors?
What is IR35?
Implemented in the year 2000, IR35 was and still is a tax law designed to combat tax avoidance through the use of ‘disguised employment’. Simply put, ‘disguised employment’ is when a person engages with a business through a limited company to carry out work that would usually be completed by an employee. Operating this way means they take advantage of tax efficiencies, allowing them to pay comparatively less tax and National Insurance.
The purpose of the legislation is to ensure that contractors that are in ‘disguised employment’ are paying the correct amount of tax. If you’re genuinely in business on your own account then you will not be caught by the legislation and can therefore, take advantage of the tax benefits available when working through a limited company.
The IR35 rules are applied on an assignment-by-assignment basis; and currently contractors working within the private sector are responsible for determining the IR35 status of the contract and paying the correct Income Tax and National Insurance contributions for each contract they take on.
However, this is due to change on the 6th April 2020, when the current IR35 rules in the public sector are extended to the private sector.
The release of detailed plans
On the 11th July 2019, as part of the release of the Draft Finance Bill 2020, the government revealed its detailed plans for next year’s reforms to off-payroll working. These reforms are due to be introduced to medium and large businesses, leaving small businesses unaffected. These medium and large businesses will then become responsible and liable for determining the IR35 status of the contractors they work with.
What does all of this actually mean? We’ve explored some of the key points below:
- The small business exemption
As mentioned above, the reforms will not apply to small businesses – as defined by the Companies Act 2006.
- Income Tax and National Insurance deductions will be paid by the fee payer
If your contract is deemed to be inside IR35, then the amount paid for your services will be seen as employment income. The fee payer, the organisation that pays the personal service company, becomes the employer for tax purposes and is required to make deductions for PAYE tax and National Insurance contributions from the contract income.
- Debt transfer provisions
This gives HMRC the power to collect unpaid Income Tax and National Insurance contributions from another organisation in the supply chain, should the entity responsible for paying the limited company (referred to as the fee payer) fail to pay these.
- Improvements to the Check Employment Status for Tax (CEST) tool
The CEST tool is a digital tool designed by HMRC, to help decide if your contract falls inside or outside IR35. There has been a lot of debate surrounding its accuracy, HMRC have advised that they are making improvements to the tool and this will be made available later in 2019.
The impact on contractors in the private sector
The employment status tests are not changing. The only change is in who is responsible for applying the legislation.
If your contract and working relationships are similar to those of an employee then you could be deemed as falling inside IR35, meaning the income from your contract will be subject to PAYE Tax and National Insurance deductions like an employee.
Though there is a significant amount of nuanced details for IR35, there are also three key pillars to determining your status:
- Control: If your client imposes a level of control over your work the project is likely to fall inside IR35. Some things to consider – does your client set your working hours, keep a close eye on your work, and dictate how you approach the work? Do you need consent to be given time off work, and are you able to choose the location in which you carry out the work for your client?
- Mutuality of Obligation: In permanent employment your manager would typically give you work to complete, and when that was done, they would have more for you. You would accept this further work and the cycle would continue. Both you and the employer are obliged to keep this relationship going until one party terminates the contract. However, if your contract is outside IR35 then you have no obligation to accept any additional work offered and the deliverables may be renegotiated at the end of each contract.
- Personal Service / Right to substitution: One hallmark of an employment relationship is the fact that you are engaged to complete the work personally. If you have an unfettered right to send a suitably qualified substitute in your place without requiring your employer’s permission, this points towards a business to business relationship
We hope our overview of IR35 has been useful, and that we’ve answered some of your questions. It is important to note that determining the IR35 status of a contract is not a tick box exercise, and a holistic approach is needed.