IR35 FAQ's

“IR35” isn’t new, it’s the name given to the tax legislation in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).  IR35 applies to any contractor working through a Personal Service Company ‘PSC’ and seeks to ensure that PSC contractors pay the correct employment taxes and NICs.

Essentially, IR35 was introduced to ensure that PSC contractors, who would be employed by the client, if it were not for the PSC they work through, pay PAYE and the correct National Insurance contributions. IR35 seeks to establish whether a contractor is genuinely self-employed or a ‘disguised employee’ for tax purposes.

Unfortunately, it’s complicated to get to grips with due to the complexity of the legislation (that’s why we made this FAQ!), so read on to hopefully get some of your questions answered.

IR35 applies when a contractor works through a UK limited company or a Personal Service Company [PSC] and where the taxes and National Insurance Contributions are not deducted at source, but rather the contractor is paid a ‘gross’ wage.

HMRC introduced the ‘off-payroll working rules’ to the public sector in 2017. The off-payroll working rules imposes an obligation on the public sector body to inform the intermediary of the status of the contractor and whether the contractor is regarded as an employee for tax purposes (i.e. inside IR35). Prior to this change in legislation, it was down to the contractor to decide whether they were ‘inside IR35’ or ‘outside IR35’ and deduct the appropriate taxes accordingly. All public sector clients that are listed as a public authority under the Freedom of Information Act 2000 were affected by this change.

We’ll admit, it’s sometimes not the easiest task to go through everything for IR35 – especially given there’s no definitive rule for all cases, but it’s vital to go through the criteria and work everything out to eliminate the risk of not being compliant (and potentially being investigated).

On 6th April 2021, the IR35 changes in the private sector were introduced, which means the responsibility for operating the off-payroll working rules are now on the fee payer rather than the contractor.

This means that both Public and Private sector clients are now responsible for determining the IR35 status of an assignment.

The new working rules only apply to medium and large private businesses as ‘small companies’ are exempt.

The definition of a small business is based on the s382 Companies Act 2006 which means that a company qualifies as small if two of the following conditions apply for two consecutive financial years:

• Annual turnover – no more than £10.2 million;
• Balance sheet total – no more than £5.1 million; and
• Number of employees – no more than 50 employees. If an individual “provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and if the rules apply,” according to official government guidance. Let’s break it down and try and reduce any headaches when it comes to IR35.

It’s somewhat easy to think if you have a limited company and work isn’t permanent, you’re a contractor in the eyes of HMRC, but in reality, there are several questions that need to be asked.

There is no one example to determine if IR35 rules apply or not.

HMRC looks at the contract that is in place as well as the day to day working practices to determine the nature of the engagement.

If you are considered ‘outside IR35’ then you are classified as genuinely self-employed and can receive gross payments to your Ltd company and enjoy the tax advantages that come with it.

If you are considered ‘inside IR35’ then you are ‘a disguised employee for tax purposes’ and are required to have PAYE tax deducted prior to your Ltd company being paid.

If the off-payroll working rules apply then the end client that you are working for is responsible for determining whether you are genuinely self-employed or a disguised employee for tax purposes. They will take into consideration the contracts in place as well as how you will work and interact with the end client.

Your off-payroll status is not determined by one factor, instead, all of the below factors are considered to paint an overall picture of your employment status for tax purposes:

Direction and Control

• Do you have complete autonomy over how, when and where you complete the work? Or;
• Does the client specify that you need to be at the office, what hours you should work and when you can take a lunch break?
• Does the client request that you report to a manager to provide updates on your progress?

Substitution

• Are you able to send an alternative worker in your place, if you are unable to fulfil your obligations? Or;
• Are you personally required to carry out the work?
• Do you have practices in place that show how you would enlist a substitute if you haven’t previously used one?

Mutuality of Obligation

• When your contract finishes, is the client obliged to offer you further work and extend your contract?
• Are you obliged to accept an extension, if your contract has come to an end?
• Are you obliged to complete a notice period, similar to length to that of an employee?

Other factors to consider:

Financial Risk

• Are you required to correct any faulty or sub-standard work at your own expense and time?
• Are you required to hold business insurance to protect yourself from any claim that could arise against your company?
• Do you incur expenditure on training to ensure your skills are to the required level for the engagement?
• Do you provide your own equipment?

Part & Parcel

• Do you have access to all the same staff facilities that employees do?
• Do you attend staff meetings?
• Do you attend staff social events or receive staff benefits?

Exclusive Service

• Do you work for just one client or do you work for a number of different clients?
• Have your contracts been renewed numerous times?

Basis of Payment

• Are you paid a fixed hourly/daily rate? Self-employed people are often paid by the job.
   

Intention of the Parties

• Did the end client intend the worker to be self-employed?
• Are you engaged through a contract which is a contract of service or a contract for services?

Working through a limited company with an inside IR35 determination could mean that your take-home pay could decrease by 33% to accommodate the additional tax and National Insurance (i.e. NIC and ENIC).

If your assignment is found to be inside, you are still able to work using your Ltd company if your agency is able to accommodate this. Your agency would be responsible for deducting NI and TAX at source before paying a net amount to your Ltd company.

You may find that this is not the most financially beneficial option to work ‘inside’ assignments and may benefit from using a different engagement model such as PAYE or an Umbrella Company.

Some view IR35 as a negative for the contracting community, but it crucially allows HMRC to more easily distinguish between who it views as legitimate contractors (those ‘outside’) and those who don’t fit the criteria.

IR35 is certainly not going anywhere, and as tech recruiters, we certainly do not see IR35 as the death of contract recruitment. There is still room for flexibility, work benefits and most importantly, the huge contribution contractors make to the UK economy.

The rules enforced in April 2021 require being informed, building compliant working practices and a careful approach from businesses when it comes to ensuring the guidelines are followed (i.e. how contract engagements are worded, managed, and more). Overall, the contract side of our business continues to flourish, with IR35, and we continue to grow our dedicated contract team to support this.

As recruitment specialists, we are well-versed in conversations about IR35 and are committed to offering the best support to our clients about working with it.

Our dedicated talent solutions division, Understanding Solutions, additionally, has a clear Statement of Work (SOW) and deliverables in place to ensure all its activities are ‘outside’ IR35.

There are IR35 tools that can offer some guidance on the matter that may indicate a more detailed review of a contract and working practices could be required, one of which is provided on the government website and another on IT Contracting.