The world of tax and small business accountants is full of acronyms and jargon, and IR35 is one of the more relevant in HMRC’s armoury of confusing terms.
IR35, or Intermediaries Legislation, was introduced in 2000 with the intention of preventing people from working through personal service companies to avoid paying employment tax. At a very basic level, it affects all contractors who do not meet HMRC’s definition of self-employed. The regulations determine whether contractors would have an employer/employee relationship with their end clients if the agency or intermediary body didn’t exist. If they find the relationship to have those characteristics then, under IR35, that contractor is taxed as if they are an employee. As we have talked about on a previous blog, through a limited company you can use low salary and high dividend payments to pay lower amounts of Income Tax and National Insurance Contributions (NICs). IR35 prevents this workaround by requiring someone to pay the same levels of Income Tax and NICs as if they are employed directly, rather than contracted to work through a limited company. The long and short of this is, if you’re a contractor, you need to be up to speed on IR35 and aware of how it may affect your income. It could be significant, reducing net income by up to 25%.
Are You an Employee or a Contractor?
This is the big question at the heart of IR35 and not one that is necessarily easy to answer. Just because you believe yourself to have a contractor relationship with your client, does not mean HMRC agrees. IR35 is not a perfect set of regulations, in fact, it has been heavily criticised, and as such it does not fit perfectly to everyone’s unique situation. Both the contract you have with the client and the working practices you follow should demonstrate that you are not an employee. This is why we always recommend you do your research and ensure you’re covered. HMRC are very strict with IR35 enforcement. In 2017, for the public sector, they shifted the responsibility for deciding the IR35 status of providers on to the end client. As a result, more contracts were deemed to come under IR35 and more Income Tax was paid. In the Autumn Budget 2018, plans were announced to extend this to the private sector as well, but not until 2020. Given that the responsibility for deciding IR35 status will now almost exclusively lie with organisations rather than individuals, it is vitally important you are able to prove that you are working as a contractor rather than an employee.
What Affects Your IR35 Status?
There are three key principles that are considered to decide whether your contract will come under IR35. That said, each case is individual and IR35 regulations are incredibly complex, so each case should be decided on its own merits. HMRC will also look further than just the contract if they suspect foul play, so your working practices should also reflect your contractor relationship. Ensuring you are mindful of these principles is a good foundation.
How much control your end client has over your work, how you complete it, when and where, will help to inform HMRC about the relationship. If you are subject to appraisals or regular monitoring and management guidance, then this will indicate you are an employee rather than a contractor.
Are you required to carry out the work yourself, or can someone carry it out in your place? If you have to provide your services personally then this is taken as an indicator of being an employee. A contractor would be more likely to be able to send someone else on their behalf.
Mutuality of Obligation
Mutuality of obligation is a concept whereby the employer is obliged to offer work, and the worker is obliged to accept it. If this is in place, then that is a big indicator of an employer/employee relationship. To qualify as a contractor there must not be any mutuality of obligation, whether in contract or practice. These are the three key principles upon which IR35 status is commonly decided. As we mentioned earlier, they will not fit everyone’s unique scenario perfectly and cases must be looked at in detail to ensure compliance. Aside from these, there are several minor factors that will also inform decisions. Such as whether you are paid on completion of work, or at regular intervals, or whether you’re contractually obliged to only have one client at a time. Using your own equipment is a good indicator of a contractor relationship, whilst being involved in the corporate structure of a business is a big red flag for an employee relationship.
Get Expert Help to Get it Right
We have covered only the very basic principles of IR35 regulations in this blog. They are highly complex, incredibly detailed and should be taken very seriously by anyone working as a contractor, in the public or private sectors. You may feel confident that your work is not covered by IR35, but unless you can prove this to HMRC you could find yourself on the wrong side of a hefty tax bill. With matters as complex and significant as these, it is always best to engage the experts to look at your particular case in detail. If you’d like help ensuring you are IR35 compliant, then get in touch today. HL&W are small-business accountants, based in Basingstoke.