October 16, 2021
The changes to the IR35 rules came into effect on April 6, 2021, after being delayed a year due to the pandemic. Whether you are an experienced contractor or recently started your own limited company, it is important to understand how this may affect you.
How does IR35 work?
IR35 is the Intermediary Legislation, which is part of the Finance Act. This law was first introduced by HMRC in the year 2000 to stop those working as “disguised employees” from avoiding paying tax and National Insurance. At the time, anyone being contracted to deliver a service was responsible for defining to HMRC if they were inside or outside IR35. In 2017, the law was modified only for the public sector, passing the responsibility of employment status determination to the companies requesting the services.
From 6th of April, 2021, this also changed in the private sector, passing on the responsibility to medium and large-sized companies involved in this type of business agreement. If these companies fail to report the correct status of their contractors, they could face heavy fines, so there is a lot of pressure on businesses to get it right.
On the hint side, this law supports equality in the workplace, in the sense of ensuring that if two people are performing the same job, they are equally paid, rather than creating a pay gap depending on the individual being a permanent employee or a contractor.
What does “disguised employment” mean?
A disguised employee is a contractor who works for a business in a permanent position and acts as an employee – it could be by wearing the employer’s company uniform, having set working hours or reporting to someone within the business. As a contractor, however, they are not part of the company’s payroll. This is known as off-payroll and what it means is that they pay taxes and National Insurance by themselves and therefore fall into a different tax bracket and rules.
In a nutshell, there is ambiguity on whether they are an employee or a contractor.
Am I inside or outside IR35?
The term inside IR35 refers to whether the contractor should be determined an employee and being registered as a PAYE, whilst the term outside IR35 means that the contractor is indeed delivering services as a contractor and should be off-payroll.
There are several factors to consider when determining whether you are inside or outside IR35:
Direction and control
If as a contractor, you can decide the work you do, how you do it, where you do it and manage your hours-pattern, it means you are outside IR35. If the client has authority on any of this, you might want to discuss the terms of work to define your status clearly.
Substitution
If you were unable to do the work yourself or require hiring someone to assist you, are you able to do this through another individual? If your answer is yes, you are outside IR35. If your employer is expecting the work to be done by you only, you are inside IR35.
Mutuality of obligation
Does your service finish once you completed the work you were contracted for? Are you able to decline further work? Is the client under no obligation to offer you further work? If you said yes to all of these, you are outside IR35.
Financial risk
Do you have your own liability insurance and are you liable for rectifying any defective work at your own cost? If so, you are outside IR35.
There are other aspects and examples of situations that could define your services as inside IR35, therefore if unsure, talk to an expert. You can also find more information in the UK government website.
How does IR35 affect limited companies?
As a one-person limited company, you probably want to ensure that you don’t fall inside IR35. Here are some recommendations that can help:
- Ensure your terms of contract are specific and stick to them. It is great to have good relationships with clients but be aware that certain actions could affect your status as a taxpayer. Unless you want to go through lots of hassle and document proving, it is best to be clear from the beginning.
- If the job needs to be performed within the client’s premises, request to work from home if suitable and pertinent and enable your email to record that you are working from home.
- Provide the service with your own equipment and look after your own bills. Always keep receipts.
What to do if I disagree with my client’s determination?
If your client decides that your employment status is inside IR35 and you disagree, you have until the last payment made for your services to disagree. You will need to express this disagreement along with your reasons and keep copies of this disagreements as a record. The client has 45 days to respond and if they agree to the change of status, they will need to give the new status determination and confirm what date this is valid from.
What happens if I get caught by IR35?
If HMRC is unsure about the status reported by any of your clients, you might receive an IR35 enquiry letter. This is a request to provide copies of your contracts and a breakdown of the income resulted from those contracts. It is an opportunity for you to explain the working relationship with the client and demonstrate that your working practices fall outside IR35. Once HMRC is happy with what has been reported and proved, the case will be closed. If you cannot demonstrate you are outside IR35, your employer will be required to pay the corresponding PAYE and National Insurance, plus interest and a fine.
Quick IR35 recap
If you are a contractor, freelancer, intermediary or one person-limited company, you must ensure you set out contract terms with your clients that are clear about terms of work that fall outside IR35. Most importantly, stick to them to avoid getting caught within IR35.
If you require to speak to an adviser or help with contract terms, give us a call. We can help.
