An overview of the off-payroll working restrictions and IR35
A section of tax legislation known as IR35 went into effect across the United Kingdom in April 2000 and aims to differentiate between contractors who operate as legitimate self-employed businesses (via a limited company often referred to as a personal service company) and contractors who work as “disguised employees”.
Contractors that use a Personal Service Company (PSC), such as a limited liability partnership or limited company to provide their services can evade paying the correct amount of taxes (in the eyes of HMRC). These contractors are known as disguised employees. But in practice, they aren’t really offering a business-to-business service; instead, they are operating more like an employee of their client (the end hirer).
There are two phrases used in relation to IR35 that indicate your position and whether or not you are functioning inside the legal parameters. Contractors who are “inside IR35” are considered employees for tax purposes and are required to be paid with HMRC’s tax system – Pay As You Earn (PAYE), whereas contractors who are “outside IR35” are truly self-employed.
The off-payroll working rules were revised by HMRC in April 2017 for the public sector and April 2021 for the private sector. The changes meant that the end client hiring the contractor was now in charge of ascertaining their employment status. Before the off-payroll reforms, contractors were in charge of it. The fee-payer is now responsible for accounting for, withholding, and paying the required tax to HMRC on behalf of the worker as a result of the revisions.
Determination of IR35 status
Depending on whether a worker is treated as self-employed or employed for tax purposes, their employment status affects the taxes that both the worker and the deemed employer must pay. The final client (the end hirer who the contractor or freelancer is working for) in both the public and commercial sectors is in charge of ascertaining a contractor’s IR35 status.
Determining if a contract is under or outside of IR35 is a complicated process that takes into account several variables. They consist of, but are not restricted to:
- Substitution: The ability of a contractor to provide a substitute worker to do the service is known as substitution.
- Control: The extent to which the hirer has authority over the method, schedule, and location of task completion; also, whether the employee is working genuinely autonomously on the project.
- Mutuality of obligation: Are you required to accept work that your end client provides, or are you required to provide it?
After determining the IR35 status, the end client is required to give the contractor and the recruitment agency a formal Status Determination Statement (SDS). The SDS details the contractor’s employment status for the function (whether it falls inside or outside of IR35) and explains how the decision was made. Contract-by-contract, an employment status determination and SDS must be performed. Depending on the assignment you accept, your work status may change.
The only times the off-payroll working regulations don’t apply are when you work for a small client in the nonprofit or private sectors that qualifies for the small business exemption, or when the end client is wholly located outside of the UK. In these situations, evaluating whether the regulations apply and the employment status of the contractor falls under the purview of the intermediary (recruitment agency).
Working inside IR35
If your contract has been found to be inside IR35, it indicates that you are treated as an employee for tax reasons and that the terms of your engagement are comparable to those of a permanent employee. Similar to permanent workers, contractors covered under IR35 are required to pay income tax and National Insurance Contributions (NICs).
The fee-payer, which is typically a recruiting agency or umbrella business, will be required to deduct your tax and NICs at source before making a net payment into your personal bank account if you are hired by a medium-sized or large private sector client or a public sector client.
You could be paid into your limited firm even if you are inside IR35. In such a scenario, before releasing a net payment for the finished task, the fee payer—that is, the organisation paying your limited company—must subtract income tax and national insurance contributions. For any inside IR35 project, a gross payment cannot be made into your limited company. If you are inside, you should be aware that operating through a limited company does not provide tax benefits, and most end users or recruitment firms will demand that you register with an umbrella company or receive payment through agency PAYE.
When working outside IR35
If you are found to operate outside of IR35 after a status determination, it indicates that the end hirer has determined that the terms of your employment are truly self-employed. It is possible to operate with a personal service company (limited company) as a director and get paid in full for the work you do. You can pay yourself more tax-efficiently if you are not subject to IR35 by combining dividends with salary; nevertheless, you will still be liable for your taxes.
Top 10 umbrella companies
Working on assignments inside IR35 usually means you must use an umbrella company for your payroll. In this case, please ask your recruitment agency if they have a Preferred Supplier List (PSL) – a list of umbrella companies they approve. As you are responsible for paying the correct taxes, you must ensure that you use a compliant umbrella company. To help you with your search, we’ve collated a list of our top 10 umbrella companies, and they are all accredited by the FCSA or Professional Passport. If you want to use one of the top 10, it may not appear on your agency’s PSL. In this case, ask the contact at your agency if they would consider adding them.
