If you run a business and hiring contractors or you are self-employed, then you probably have heard about IR35- Intermediaries Legislation 35.
IR35 is legislation in place to make sure people employed through disguised employment like contactors, pay the same amount of national insurance, and tax as employed people.
It is designed to stop workers who pay less tax using an intermediary, such as a limited company.
Such workers are called as ‘disguised employees’ by HMRC.
If someone is caught working this way, they will be asked to pay national insurance and tax as if they were an employee.
However, there is much confusion over IR35. Here let’s see what IR35 is and whom it applies to in more details.
What is IR35?
IR35 is a group of tax rules that apply to you if you work for a client through an intermediary which can be a personal service or a limited company.
If you caught within the legislation, then you need to pay about 25% more in tax every year.
The government defines IR35 as ‘Off-payroll working through an intermediary’.
What does ‘outside IR35’ mean?
If your contract is deemed outside IR35, then you are free to pay yourself in a most tax-efficient way and considered self-employed for tax purpose.
A contractor who comes under outside IR35 is responsible for making sure all his personal and company taxes are paid on time and calculated correctly.
What does ‘inside IR35’ mean?
If your contract is deemed inside IR35, you’re considered an employee for tax season.
That means you need to pay tax at the same rate as employee pay.
Tax and employment legislation are separate currently. So, whilst you are considered an employee for tax purpose, you may not be automatically entitled to employment rights and benefits.
What are the implications of inside IR35?
When working inside IR35, you will need to pay income tax and national insurance contributions (NICs) on your earnings.
For those working in the private sector currently, this is paid via a ‘deemed payment’, which is the payment you required to pay to HMRC at the end of the tax year.
Calculation of the ‘deemed payment’ is relatively complex. For such a case, it is advisable to seek professional help in doing so.
For those working in the public sector currently, do not need to work this out. Your employer will do this and deduct the NIC and Income Tax on your behalf from your invoice before paying you.
Checking your IR35 status
Here’s a non-exhaustive IR35 compliance list of some factors that can indicate your IR35 status.
- You have the right to substitute work contracted to another person, and that right is exercised in practice.
- You work in your own limited company and do not get employment benefits such as paid leave or sick pay.
- You are being paid at a fixed price or on a project basis.
- You work from your own premises or supply the appropriate equipment.
- You work with a variety of clients at one time or on short successive projects with a variety of clients.
- You have your own branding, premises and insurance.
- You personally carry out all of the work which your company is contracted to do.
- You have your own limited company, but get employment benefits such as sick pay or paid leave.
- You are being paid on the basis of time.
- You work under close supervision by someone in your client’s business.
- You worked at your client’s premises and supplied with the equipment by them.
- You work with one client for long-period.
- You don’t have your own business identity
HMRC also offers an online tool – Check Employment Status for Tax (CEST) that you can use as a general guide to check your status.
Who is liable for IR35?
As it stands until March 2021, for the public sector, the end client is responsible for determining their contractor’s IR35 status.
If the end client decides that the contractor is operating inside IR35, they must ensure the income tax and NIC is paid.
For the private sector, contractors are responsible for determining their own status, and if they decide they are operating inside IR35, they must ensure the income tax and NIC is paid correctly.
In case the contractor is working outside of IR35, and somehow HMRC has reasons to question that, then they can ask for evidence of working outside the legislation.
HMRC can investigate you about your IR35 status at any time, and for that, they can evaluate past contracts of up to six years to see if the legislation should have been applied.
Changes in IR35 rules
There will be an IR35 update for the private sector in April 2021, which will align private and public sector IR35 rules.
In 2000 when IR35 first came into force, each contractor was responsible for assessing their own IR35 status, and it was individual’s limited company or agency that was responsible for accounting for any tax and NICs due where IR35 was applicable.
Then in 2017, rules changed, in the public sector, the responsibility for ensuring IR35 is shifted from the contractor to the public sector organization engaging them.
For the private sector, the responsibility for ensuring IR35 remained with the contractor.
In April 2021, when the changes take place, the responsibility for setting IR35 status and paying relevant tax will shift from contractors to the private sector body engaging them – like in the public sector.
This IR35 changes in the private sector will exclude ‘small’ businesses; however, that means that contractors working for them will continue setting their IR35 status on their own.
IR35 is complex legislation; however, by fully familiarizing yourself with the information and taking the appropriate steps to comply with IR35 rules, you’ll be able to work as tax-efficiently as possible. Whether you’re working with contractors or you are a contractor, it’s worth educating yourself to the best possible level.