IR35 – Does it Apply to You?

IR35, or off-payroll working rules, was introduced by HMRC as a way of assessing whether contractors are genuinely contractors, and not actually what they call ‘disguised’ employees to avoid paying tax, such as NI contributions. A contractor working through a limited company can take advantage of several tax options not available to an employee.  On the other hand, they also have fewer benefits like; holiday pay, sick pay, and employer pension contributions. However, it can be the case that contractors and their clients are taking advantage of this situation and the contractor is to all intents and purposes an ‘employee’ without either party paying the right taxes.

IR35 was introduced for the public sector in 2000 and will now be applied to the private sector from April 2021.  As a result, it will be necessary to apply the rules of IR35 to contracts or engagements to determine the employment status of the ‘contractor’.  These rules decide whether that contractor falls inside or outside the IR35 rules.

What are the changes going to look like?

As we already mentioned, IR35 has been in place in the public sector for some time, but it will now be applied in the private sector from April 2021. This means:

  • Medium and larger businesses will now be responsible for determining the ‘employment status’ of contractors
  • Once this status has been assessed, they will inform contractors of their deemed status through a Status Determination Sheet, with reasons for the decision taken. 
  • Contractors can dispute the decision if they do not agree with it.

Small businesses are exempt from the changes, in that case it is the contractor’s responsibility to work out their employment status.

What does ‘inside’ IR35 mean?

To be ‘inside IR35’ means that you are considered, for tax purposes, an employee of your end client and therefore subject to PAYE.

How do you know if you are a small business?

You must meet two of the criteria below, over two consecutive years, to be classified as a small business.

  • Your annual turnover should be no more than £10.2 million
  • There should be not more than £5.1 million on the balance sheet
  • The business employs no more than 50 employees.

How do you know if a contract is inside or outside IR35?

Understanding IR35 is complicated. In many cases where IR35 status has been disputed, only employment lawyers can truly understand the nuances.  However, there are some basic tests that can be applied.

  • Supervision.  If the client controls how the contractor does their work, decides the hours, where they work, guides how the work is executed etc. They are most likely employees.
  • Substitution.  An employee couldn’t very likely send someone else into their work on days they aren’t able to attend to do the job for them.  So, if the contractor needs to do the work themselves, and cannot send a substitute, they are probably an employee.
  • Mutuality of Obligation – This is also known as MOO, for short, and also because it sounds cute.  What it means if there is an element of mutual obligation for the client to offer work and for the contractor to accept it. Or if the contractor only works for once client all the time, then, once again, this would imply an employer & employee relationship.,
Other matters can be used as evidence of employee status. For instance:
  • When the contractor uses the client’s equipment rather than supplying their own
  • If employees within the client company report to the contractor
  • How the contractor is paid i.e., a fixed monthly sum, rather than on a project-by-project basis.

Whether you are a business or a contractor we advise you prepare for IR35 and understand your status.  You many need to speak to your clients or contractors to fully understand their status.  HMRC have a tool on their website that will assist you in determining whether you or a contractor fall within or out of IR35 status.

If you have any questions about IR35, or if you are not sure how it applies to you, don’t hesitate to get in touch with us.

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