IR35 – What do you need to know?
IR35 is probably the most talked-about piece of legislation in the contracting world. It was introduced by the UK Government in 2000, but since then it has been subject to numerous changes, advancements and amendments. More changes were due to come into force in April 2020, but have been delayed until April 2021. Here’s everything you need to know about IR35 and the upcoming changes to the legislation.
What is IR35?
In a nutshell, IR35 is a piece of anti-avoidance tax legislation that is designed to tax ‘disguised’ employment at a similar level to regular employment. It mostly targets contractors who work through their own limited company who are, for all intents and purposes, actually in an employment relationship with the firm they are contracting for. But, how do you know whether you are in disguised employment?
Are you in disguised employment?
Disguised employment is where in the absence of the intermediary, your limited company, the relationship between yourself and the end hirer world is one of employment. IR35 is there to ensure that those contractors working in disguised employment pay broadly the same tax as any other employee. There are a number of factors that HMRC look into when determining your IR35 status:
- Control – Are you free to choose how you work? Or are you directed by your client? Contractors that are genuinely in business on their own account would have greater control
- Substitution – Can you send someone else to do the task for you? If you have a genuine right of substitution this points to a lack of personal service and a position outside of IR35.
- Employee benefits – Contractors do not get sick pay, holiday pay, or invitations to company events
- Equipment – A contractor is expected to use his/her own equipment. An employee would have their equipment provided for them.
- Mutuality of obligation – if the business has an obligation to provide you with work and you have an obligation to accept this work this points towards an employment relationship.
You can still do work for a client as a limited company if you fall within IR35. However, you will be subject to higher tax and national insurance contributions.
Who is responsible for determining IR35?
Now, here is where things get a little more complicated. It depends on whether you are contracting in the public or private sector. In April 2017, changes to IR35 meant that, for public sector contracts, the responsibility of determining a contract’s IR35 status falls with the end client. The end client is the end-user of the contractor’s services so, in this instance, the public sector organisation.
If the end client asses that the contractor falls outside of IR35, then the contractor can carry on as normal via their limited company. However, if the end client decides that they fall inside IR35, then the fee payer (usually a recruitment agency) would need to make PAYE and National insurance deductions on all the contract’ income. Including payment of employers national insurance contributions
For private sector contractors, the responsibility lies with the contractors themselves, but only for the time being. Changes were due to come in place in April 2020 to align public sectors contractors with private sector contractors, but due to the chaos with COVID-19, this was pushed back to 6th April 2021.
Penalties and sanctions
Following an HMRC enquiry, if you are found to be within IR35 you must pay all the tax and National Insurance contributions due, as well as any interest due on these amounts.
If it is found that you did not take reasonable care in submitting your tax and national insurance contributions, then you may also have to pay a penalty to HMRC. Find out more about HMRC’s IR35 enquiry procedure.
Of course the above only applies where you are responsible for determining the employment status of the assignment. Where the responsibility lies elsewhere, as in the public sector currently, the liability sits with them also.
We’re here for you
At SJD Accountancy, our team of experts are on hand to give you the best advice and protection when it comes to dealing with IR35. If you would like any advice, or to find out more, please contact our team.