What is IR35?
If you are currently working as a contractor or are considering becoming a contractor, IR35 is something you will probably have heard mentioned quite a lot. So, what is IR35?
HMRC introduced IR35 (or off-payroll) in 2000 in a bid to tackle the problem of ‘disguised employment’.
Disguised employment is where companies engage workers on a self-employed basis, rather than an employment contract. Companies hiring contractors on a self-employed basis will not have to pay employment costs or give the contractor employee benefits – making it a more cost-effective way of getting the work done.
The benefit for contractors is that they can take advantage of the tax efficiency of working through their limited company when, in reality, they are essentially working as an employee.
This is where the term ‘disguised employment’ comes in, as businesses are engaging contractors and freelancers on a self-employed basis to disguise their actual employment status to avoid paying the appropriate amount of tax.
IR35 assesses whether contractors and freelancers are genuinely self-employed. Contractors who are deemed inside IR35 must pay tax and National Insurance in a very similar way to how an employee in a permanent role would.
Who is responsible for IR35 determinations?
When the rules first came into play in 2000, it was the responsibility of the contractor to determine their IR35 status. Where IR35 applied, it was the responsibility of the contractor (through their limited company) or the agency to make the tax deductions.
In 2017, HMRC introduced off-payroll working rules to the public sector. The responsibility of determining a contractor’s IR35 status now lies with the public sector body engaging them. If the contractor is inside IR35, it is the responsibility of the hirer, agency or umbrella company who pays the contractor to deduct the tax and NI and pay it to HMRC.
Off-payroll in the private sector will be effective from April 2021, HMRC will apply the public sector rules to the private sector.
What are the assessment criteria for IR35 determinations?
It is always worth getting advice or a review of your status to ensure you have received a correct IR35 determination. However, an IR35 determination generally looks at a review of three principal tests of employment and considers whether they can be applied to your role.
- Supervision, direction and control – What degree of control does the client have over how you complete the work? Do they specify when you work and how you complete the tasks?
- Substitution – Can you send someone to complete the work in your absence or to complete the contract? Do you have to be the one to complete the assignment?
- Mutuality of obligation (MOO) – Is the employer obliged to offer work? Are you obliged to accept it?
There are many more factors to consider when determining the IR35 status of a contractor, and you should always seek expert IR35 advice before starting a contract.
IR35 assessment tools
If you are working through an umbrella company, speak to them about IR35 assessment tools. They may have a specialist or tool they can refer you to check your status. Otherwise, you could look into the following:
- An IR35 specialist – specialists such as Bauer and Cottrell can offer in-depth reviews of contracts and determinations under the new rules. They can also provide a second opinion if you believe you have been incorrectly assessed.
- IR35 Shield – is a handy online tool for contractors and freelancers to use to get an online assessment and status determination. More information is available here.
- Check employment status for tax (CEST) – you can use this tool to see if HRMC will treat you as employed or self-employed for tax purposes.
What happens if you believe you have been incorrectly assessed?
If you believe you have been incorrectly assessed, speak to your end client and find out what they believe has deemed you inside. This should hopefully clear up any queries and will highlight the area that has put you inside.
If you’re sure the determination is incorrect, it is worth speaking to an IR35 specialist. A specialist will know the legislation inside out and will be able to look at your contract and see whether the determination is correct or not. You can then present this information to your end client.
If your client has not changed your status, you can contact HMRC for a status review.
What insurance should you have in place for IR35?
This is a crucial question which will no doubt be at the forefront of many contractors’ minds, especially with the 2021 changes looming. As a contractor, you want to avoid an IR35 investigation at all costs because they can be very stressful.
For contracts that start on or after 6th April (2021), private sector contractors who are engaged by medium to large-sized businesses will no longer carry the risk – because it is the fee-payer (agency or end client) who is liable. Therefore, you would not need insurance for these contracts.
For public sector contractors, this has been in place since 2017 when the legislation was implemented.
However, HMRC can open an inquiry up to six years ago if they suspect foul play, and more than six years if there is evidence of tax avoidance. IR35 police or legal protection could help towards the cost of legal fees or penalties you may face.
It is always worth speaking to a specialist as they will be able to recommend what insurance you may require (if any), from the following:
- Tax enquiry and legal expenses policy
- Contract reviews and IR35 protection cover (including taxes, interest and penalties arising from an HMRC investigation)
- Business legal protection insurance
IR35 and legal advice services
IR35 is a complex piece of legislation, but familiarising yourself with the rules and ensuring your working practices are compliant with the guidance is of paramount importance. If you would like to speak to an expert or have a contract or determination reviewed, why not take a look at our IR35 Contract & Legal Directory for professional organisations you can trust.
Take a look at our top 10 umbrella companies
One of the main benefits of working through an umbrella company is that you do not have to worry about IR35 legislation. When you register, you will become, and employee of that company and the umbrella will make the correct tax and NI deductions and pay them to HMRC on your behalf.