What is IR35?
First things first. Let us try to understand what exactly IR35 is. IR35 was initially introduced in the year 2000 by HM Revenue and Customs (HMRC). IR35 or Intermediaries Legislation is a regulation intended to trim down tax avoidance by “disguised employees” or contractors. These disguised employees are people who are paid by a client via an intermediary in order to get away with paying less tax.
The purpose of the IR35 tax laws is to understand if a self-employed worker is authentic or is trying to trick the system to pay less tax. This law aims to bring down tax evaders.
Why is IR35 important?
The core of IR35 is the difference in the way limited company contractors are taxed and the way full time employees are taxed. The main aim of IR35 is to determine whether a worker is lawfully, an independent contractor or self-employed or whether the worker is a “disguised employee”.
A disguised employee has the same duties of an employee; however, he/she is not making tax contributions of a company employee. Even the organisation in this scenario is in the wrong since it does not give standard benefits like national insurance, sick or holiday pay to the disguised employee. Clearly, HRMC dislikes this and wants to ensure that the tax paid should be as per the employment status. These laws are put in force by HMRC through IR35.
Contractors need to verify that there is not any employment relationship with the worker, and to do so there are some employment relationship norms to decide if they are outside or inside IR35. To verify if a worker is inside or outside IR35, employers can use a tool known as CEST or Check Employment Status for Tax. This tool was released by HRMC in 2017 and helps to determine a worker’s employment status.
Employment Status – Inside or Outside of IR35
The following are three main points to bear in mind that will help to ascertain your employment status – whether inside or outside of IR35:
- Mutuality of Obligation
In essence, there should not be any kind of “mutuality of obligation” for a worker to be eligible as self-employed or a contractor. There should be no obligation on the contractor to keep on working for the client after the project is complete. The contractor can also end the project mid-way through. After the project is complete, the client is not under any obligation to offer the contractor another project. If the client is obliged to offer a paid job and you are obliged to accept it, you will fall inside IR35.
The degree of control in the hands of the contractor on the project determines whether he or she falls inside or outside IR35. The control on how the work will be completed should be in the hands of the contractor to be outside IR35. If the client is giving too much say on how the work should be accomplished, then it is probable that this will be an employment relationship and will fall inside IR35.
Does the work have to be completed by you or is it feasible to send another worker on your behalf? If the work has to be carried out by yourself, this is an indication of you being an employee and this contract will be under IR35. The substitute person should be able to finish the contracted job for the contract be outside IR35.
IR35 in the Public Sector
Earlier, the contractor declared the IR35 employment status and not the contracting organisation. However, HMRC introduced reforms in April 2017 with substantial changes for the public sector. The new rules have put the responsibility of proving the status of self-employment on the hiring organisation. Therefore, the responsibility now lies in the hands of the agency (end client) who pays the limited company. If the contract is found to be inside IR35, the deemed employees will be taxed and have to pay NICs (National Insurance Contributions) as employees to HMRC.
With the new rules in place, hiring of contractors has become precarious because the hirer is imposed with fines if they falsely classify an IR35 contractor to be an “outsider”. In order to avoid this, some public organisations like NHS and HMRC have stopped using limited company contractors.
IR35 in the Private Sector
Talking of the private sector, HM Revenue and Customs mentioned that a mere 10% of the intermediaries are following the current rules properly. The Government has said that contractors are shelling out less tax compared to employees, which is not fair. Due to these reasons, the IR35 reforms that have been applied to the public sector have been introduced for the private sector as well. However, the implementation will come into effect in 2020. The IR35 reforms for the private sector denote that it will be the responsibility of the employer to decide the contractor’s IR35 status.
Avoid being trapped by IR35
Contractors and firms under any circumstances cannot avoid IR35. For firms, the best thing to do is to ensure that self-employed contractors are hired on a fixed term contract. This means that guidelines are followed so that the contract is categorised as “inside IR35”. There are many complications and confusions pertaining to IR35. You can consult an expert and seek advice.
Get Ready for IR35
It can be complex to establish your employment status. However, you can be sure that you are sticking to IR35 rules while undertaking a contract through the following simple ways:
- HMRC IR35 test
- Reassess your present systems
- Take expert guidance
If you are not sure, whether you come “inside” or “outside” of IR35, simply take the IR35 test by HMRC to evaluate your work methods.
You can make an assessment of your present working systems depending on the outcome of the IR35 test. Then, think what can be done to crack probable setbacks.
Seek advice from experts to ensure that transformations made are conforming to the IR35 rules and other legislations.