With IR35 continually in the headlines and the 6th April 2020 deadline quickly looming, we have taken a closer look into what this tax legislation means for those affected.
HMRC describe IR35 as “Off-payroll working rules for clients, workers and their intermediaries.”
For the purpose of this article, the term ‘Contractor’ applies to the person(s) fulling work through an intermediary. ‘Client’ refers to the employer/company whom the ‘Contractor’ is working for.
What is it?
IR35 has been designed to ensure that the correct amount of tax is being paid by Contractors operating through an intermediary such as a Limited company or partnership. There have been cases where Limited companies have been set up to take advantage of tax benefits while operating on more of an employer-employee format than a freelance project-by-project basis. IR35 has been created to cut down on tax avoidance from Contractors who would be an employee if an intermediary was not used. This can also be taken advantage of from companies who pay people this way to avoid paying National Insurance contributions and providing benefits that employees would otherwise receive.
The rules for distinguishing this is being described as ‘Inside’ or ‘Outside’ IR35, which indicates the status as being a genuine Contractor (Outside IR35) or for all but named purposes an employee (Inside).
If you are operating ‘Inside’ IR35, you are considered an employee for tax reasons, which can mean you are to pay taxes as an employee. If you can demonstrate you are ‘Outside’ IR35 you are seen to be operating as a genuine Contractor and can pay yourself and taxes accordingly.
Are you in or out?
The conditions that rule you in or out can vary slightly on working conditions but HMRC count the major factors as:
Control and Direction – A key factor is if a Client controls where, when and how the work is performed. Whereas Employees are usually under the direct supervision of a line manager, a Contractor must be able to demonstrate autonomy. To be Outside IR35, whilst the Contractor may still have specific tasks to complete, or an end goal, they would have greater freedom over how this is done.
Substitution – The right to provide a substitute within a contract is another hot factor when demonstrating to HMRC. Does the Client require the Contractor themselves to fulfil the work or can the Contractor send a substitute member of their Company? If a Client depends on the Contractor themselves to complete the work, it is more of an employer-employee relationship.
Mutuality of Obligation – Another method of working out the status is Mutuality of Obligation. Is there any obligation on the Client to offer future work to the Contractor, or for the Contractor to accept work that is offered? If the answers to those are no, then there is no mutuality of obligation to accept work.
Who decides?
Whilst there is still a slim chance of delay, from April 2020, in the Private sector, the end Client will decide whether a contract is within IR35. This will be decided for every assignment on a case by case basis, so for example; a Site Manager taken on by a Client may be ‘Inside’ on one contract and in the future may then be classed as ‘Outside’. Ideally, the Client advertising the job will state whether the assignment is considered ‘Inside’ or ‘Outside’ the regulations.
What can we do?
We would be pleased to hear from anyone wanting to discuss IR35 and we have a select list of trusted umbrella/intermediary companies who we would be happy to introduce you to if this was deemed the best option for you.