When it comes to IR35 legislation, there’s so much information around that it’s hard to remember what’s important. That’s why we’ve created a succinct guide to the key terms of IR35 for you.
Our guide cuts through the noise to the key concepts of IR35, so you can quickly reference important terms. By the end of it, we hope that it’s developed your understanding of IR35 and provides a rich source of information you can refer to in the future.
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Check employment status for tax (CEST) tool
CEST is a tool developed by HMRC to help you work out whether you should be classed as employed or self-employed for tax purposes. However, there has been a degree of controversy around CEST. The accuracy of it has been called into question and it has been suggested that contracts have been deemed to be inside IR35 when they shouldn’t be.
A contractor is a person who works for themselves and typically chooses when and how they work. Contractors can operate in a variety of different ways, such as working through a limited company or working under an umbrella company.
This refers to the relationship between the contractor and their end-client. It is one of the major factors in whether your contract is deemed inside of IR35 or not. It refers to:
- How you work. For example, the control that a client has over the way in which you complete your work.
- What your work is. For example, whether it is a project or a role.
- When you work. Do you have a choice over the hours that you work?
- Where do you carry out your work and do you get to choose?
Deemed employment payment
A deemed employment payment means accounting for the relevant income as employment income.
If you are working within the private sector and your contract is inside IR35, you will need to calculate your deemed employment payment. You account for it once you have deducted the 5% allowance and any other allowable costs for example company pension contributions.
You will need to make submissions to HMRC for the deemed employment payment within the same tax year that you receive the relevant income.
It is likely that you will also need to submit your tax return at the end of the tax year.
This is due to change in April 2021, when IR35 reforms in the private sector take place.
A disguised employee is someone who works through an intermediary, but their work activities and employee benefits resemble that of an employee. This means that the worker must pay tax through PAYE. Disguised employees won’t receive benefits that employees get, such as sick pay or paid annual leave.
The end client is the company or person who you are contracted to provide work for.
This is the organisation that pays the intermediary (personal service company). It is usually the last recruitment agency in the supply chain and in circumstances where the public sector organisation has determined the IR35 status of the engagement as inside IR35, they are responsible for making PAYE tax and NI deductions.
This is when a contract makes you seem like an employee for tax reasons. In other words, you’ll have to pay tax but without the perks of permanent employment e.g. paid holiday.
If your contract is inside IR35, and you work in the private sector, you need to ensure that 95% of your income from the relevant engagement is accounted for as salary and employment costs.
If your contract is in the public sector and deemed to be inside IR35, 100% of your income will be subject to deductions for PAYE tax and NI. The fee payer (normally the recruitment agency) is responsible for making these deductions.
You can find out more about what it means to be inside IR35 in our page below.
A limited company is one way that you can run your business as a contractor.
Incorporating a limited company means you won’t be personally liable for any financial losses made by the business as your finances will sit in a separate business account.
Our limited company guide covers everything you need to know when contracting through a limited company. You can download the guide below:
Mutuality of Obligation (MoO)
This is where your employer is expected to provide work to you, and you are expected to undertake it. Mutuality of Obligation is one of the most key factors when determining IR35 status.
If you don’t have MoO with your end-client, then your contract is more likely to be viewed as outside of IR35.
National Insurance Contributions (NICs)
You pay NICs if you’re 16 or over and are either an employee earning over £166 a week or £8,632 a year.
Your NICs entitles you to benefits such as the Basic State Pension and Maternity Allowance.
Off-payroll working through an intermediary
Off-payroll working through an intermediary is what all contractors working through a limited company are doing, it is why the IR35 legislation applies to determine whether someone is a true contractor or a disguised employee who should be taxed as such.
If your contract is deemed to be outside IR35 and you work through a limited company, then you won’t be subject to additional taxation through PAYE. This means that you’ll still be able to pay yourself through dividends, which aren’t subject to National Insurance contributions. Sole traders and those working through an umbrella company are not affected by IR35.
Pay As You Earn (PAYE)
Pay as You Earn (PAYE) is a way of paying your income tax. If you work under PAYE, your employer pays your tax directly to the government and takes this amount from your salary.
Personal Service Company (PSC)
A personal service company is an intermediary where the director is involved with the provision of a service. It’s often used interchangeably with a limited company; however, it’s not an official legally recognised business entity, this is the limited company structure.
This is the part of the country’s economy which is made up of industries and commercial firms. The private sector in the UK employs around 27.04 million people.
The public sector is responsible for all public services in the UK. From healthcare to education, the public sector in the UK employs around 5.36 million workers.
Recruitment agencies are an ideal source of work if you’re new to contracting. This is because they can offer a more stable stream of income. They can give you access to jobs, help you with deciding on contract terms and rates, as well as connecting you with clients.
A substitute is another contractor who you can bring in to complete all or part of the work you have been doing for your client. This factor will be considered when assessing your IR35 status.
This is your day-to-day working activity and the working relationship between you and your end client.
Want to know more?
Do you have any further questions about IR35? We’ve created a guide to IR35 that covers the legislation in more detail.
If you have any questions about IR35 or how it could impact you, call us on 01442 353 465.
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