IR35 Advice for Contractors
If you are already a contractor or are planning on becoming one soon, as well as understanding the UK tax system, you must also acquaint yourself with IR35, or the ‘Intermediaries’ Legislation’, or ‘off-payroll working’ as it is sometimes referred to.
It affects every contractor working through a limited company. The consequences of falling foul of IR35 can be immense, so its vital that you understand how it works.
What is IR35
The Intermediaries Legislation was introduced in April 2000 in response to what HMRC deem as ‘disguised employment’. By this we mean, an employee who leaves their job on a Friday, to return on Monday doing the same role, but in the capacity as a contractor.
As a contractor, he or she can take advantage of the tax advantages of being self-employed i.e. taking dividends through their limited company and paying less National Insurance Contributions.
HMRC’s viewpoint is ‘if it looks like an employee, acts like an employee and works like an employee – it’s an employee’.
How IR35 status is determined
Determining if you fall ‘inside’ or ‘outside’ of IR35, is dependent on the specifics of your contract. It is therefore imperative that you check the specifics of every new contract. Determining the IR35 status of a contract comes down to employment law.
In order to be seen as working ‘outside of IR35’, you must be able to demonstrate that you are ‘in business of your own account’ i.e. you are not governed by employment factors.
Even though IR35 is incredibly complex, there are three tests that form the basis of all IR35 decisions. These are:
1. Mutuality of Obligation
This looks at whether you are free to work away from the contract or if you have an obligation to stay.
2. Personal service
This tries to determine if you personally must complete the work (as an employee must do).
3. Control
This examines if you as an independent expert consultant are free to use your professional discretion to decide how the assignment should be completed, or if the client exerts employer style-control over your day to day activities.
If you pass one of these tests there may be a good chance you will be deemed as working outside of IR35. However, it is vital that you get this checked by an experienced professional.
The impact of IR35 on income
If you are deemed as working inside IR35, you will pay more tax. This is because you are classed as an employee and you must pay the full amount of tax and NIC’s from all income payments you receive from the business.
IR35 in the public sector
On 6th April 2017, the liability for establishing the IR35 status of public sector contractors shifted from the contractor to the client or ‘engager’. An engager can be a government department, recruitment agency or private sector consultant.
This means the client or engager is responsible for determining the employment status of the contractor and paying the applicable taxes.
HMRC have released the Check Employment Status for Tax tool to assist public sector bodies to determine the IR35 status of off-payroll workers. There has been a mixed response to the tool, with some contractors taking the view they have been wrongly classed as being inside IR35.
If in doubt, ask
We strongly recommend that before you sign any new contract, it undergoes an IR35 review. We offer this service at no extra cost as part of our monthly accounting packages. To find out how we can support you on your contracting journey, speak to one of our directors on 01962 867550.
Note: All the information and advice in this blog post was correct at the time of writing.
