IR35; we’ve likely all heard about it. Maybe someone’s mentioned it to you in a work capacity, or it’s been the subject of pub-based tax man sledging conversation. Here we’ll outline the key elements, keeping you on the right side of things, in the immediate sense, and in the longer term (this part is especially important for contractors).
So, what is IR35?
Quoting HMRC: “the off-payroll working rules (IR35) make sure that a worker (sometimes known as a contractor) pays broadly the same Income Tax and National Insurance as an employee would.”
“The rules apply if the worker who provides services to a client through their own intermediary would have been an employee if they were providing their services directly to that client.”
Who the rules apply to
You may be affected by these rules if you are:
- a worker who provides their services through their own intermediary to a client
- a client who receives services from a worker through their intermediary
- an agency or other supplier providing workers’ services through their intermediary
Employment status and compliance / non-compliance risk (exposure)
In ‘What is IR35? Dangerous ground for independent contractors?’ Chris Andreou states, “IR35 is usually a threat to your income only if you are self-employed, and provide your services via a limited company”
He goes on to highlight that, “HMRC may decide that you should, in fact, be paying tax and NI contributions as if you were an employee.”
If your contract is found to fall within IR35*, then the difference in take-home pay usually amounts to around 20%. But that’s not all.”
“HMRC may choose to investigate previous contracts going back at least 6 years to see if they should also have come under IR35. So, this could mean a higher tax bill and a bulk payment for previous unpaid tax, plus penalties and interest.”
Within IR35 / Outside IR35…. Here we’ll turn to the excellent Contractor UK for some clarification.
What do ‘within IR35’ and ‘outside IR35’ mean?
• Within IR35
If you are determined to be ‘inside IR35’ this means you do not meet HMRC’s definition of self-employed. You are considered an employee of the end client and are therefore subject to PAYE, requiring you to ensure that you are paying the appropriate taxes.
Find out more about what being inside IR35 means here.
• Outside IR35
If you are determined to be ‘outside IR35’ this means you meet HMRC’s definition of self-employed. You are considered a genuine business and can operate and be engaged with as an independent contractor. You would be paid gross for any work completed.
Find out more about what being outside IR35 means here.
Contractor UK points out that there are 3 key IR35 employment status indicatorsto take into consideration when assessing a contractor’s working arrangement to determine whether they are ‘inside IR35’ or ‘outside IR35’.
In simple terms, here are the 3 key IR35 status indicators and what they mean:
1. Right of Substitution
Substitution is the ability of a contractor providing a contracted service to supply a replacement contractor to carry out the service under the contract.
2. Mutuality of Obligations (MOO)
MOO means that in order for an employment relationship to exist, there must be an obligation on a work-provider to provide work and an obligation on the individual to carry out the work.
Control looks at whether a worker is truly independent when working under a contract between it and the end-client. The more factors showing independence of work behaviour, choice of how and when to work etc., indicate a scenario where IR35 does not apply.