The Intermediaries Legislation or ‘IR35’ as it’s most commonly referred to is a complex piece of legislation and knowing whether you’re ‘inside’ or ‘outside’ of it can be just as confusing.
This article discusses what it means to be inside or outside of IR35 and explains who is responsible for determining your IR35 status.
First, let’s recap why the Intermediaries Legislation was passed.
The Intermediaries Legislation was created to identify people who falsely create limited companies so they can reduce their tax and National Insurance liabilities – when they should be treated and taxed as employees.
A more detailed explanation of IR35 can be found in our ‘Ultimate Guide to IR35’.
Outside of IR35
If a review of your contract or working practices determines that you’re outside of IR35, you’ll be deemed to be a genuine contractor. As such, you’ll probably decide it’s best to pay yourself a small salary, with the remainder of your income coming from dividend payments. Being outside of IR35, also means you’re responsible for ensuring the correct taxes are paid by their associated deadline.
Changes to the ‘off-payroll rules’ mean that for public sector contractors, the end-client is responsible for determining their IR35 status. If the end-client decides you’re outside of the Intermediaries Legislation, you’ll invoice them as normal and pay yourself as a salary and dividends as detailed above.
Inside of IR35
If following an IR35 review of your contract and assessment of your working practices it’s determined you’re working inside IR35, for tax purposes you’ll be deemed to be an employee.
This means that nearly all your earnings from that contract will be subject to Income Tax and National Insurance Contributions (NIC’s).
If you’re a public sector contractor, the fee payer (usually the recruitment agency) is responsible for deducting NIC’s and Income Tax at source i.e. tax is deducted from your income before it’s paid to you.
Changes to private sector ‘off-payroll rules’
From April 2020 the off-payroll rules will be extended to the private sector. This means that contractors will no longer be responsible for determining their IR35 status and instead this passes to the ‘engager’, which is generally the end-client.
How is my IR35 status determined?
If you’re contracting in the private sector contractor, until April 2020 you are responsible for determining your IR35 status. This involves relying on Employment Legislation and IR35 case law.
Several factors are applied to establish your employment status, these include; control, substitution and mutuality of obligation. These points are explained in more detail in our ‘Ultimate Guide to IR35’.
If you’re contracting in the public sector, the responsibility for determining your IR35 status lies with your end-client. Most public sector organisations rely on HMRC’s CEST (Check Employment Status for Tax) tool for determining your IR35.
From April 2020, it’s expected that many private sector organisations will follow suit and will rely on this tool to determine contractor’s IR35 status.
For your peace of mind, we recommend that every contract is reviewed for IR35 compliance. For further information on this and other services we offer, speak to one of our Directors on 01962 867550.