Guide to IR35
What is IR35? We have compiled a guide which explains everything you need to know.
As a contractor, it is your foremost duty to ensure you are completely IR35 compliant. It’s possible that you’re aware of IR35, but do you know exactly what it means? To assist you in making aware of your responsibilities, we’ve compiled a guide detailing all you need to know about the legislation and how it could affect your company.
What is IR35?
IR35 is a government legislation which was introduced as a method to reduce tax evasion amongst workers. These workers were called as disguised employees and would work as permanent employees but operate through their own company for claiming the same tax efficiencies.
How could IR35 affect you?
A contractor who is outside of IR35 would be working as an individual entity and would not be obtaining the benefits that permanent employees get. As a limited company contractor who is operating outside of IR35, you are eligible for increased tax planning avenues, which countervail for the lack of job security and other benefits.
How is my status determined?
There are a number of complicated criteria which determines whether your contract is inside or outside IR35. There are some of the factors to be considered which are as follows:
- Right of Substitution
The requirement for one specific person for carrying out a role is an essential determinant of a contract of employment. It, therefore, follows that if a contractor has the independence to select whether to perform their duties themselves or to hire somebody else to perform it (on a reasonably unrestricted basis) for them, is self-employed.
- Mutuality of Obligation
The presumption for constant work to be offered to a person and the presumption for all work offered to be completed distinguishes an employment relationship. If there is a clause including in a contract forming out an obligation for the client to provide further work and for the contractor to accept it, there would be a mutuality of obligation in the contract and it would be captured by the IR35 legislation. Rolling contracts’ or indeed contracts that are consistently renewed could, therefore, fail this test.
- Right of Control
Control concerns need the information such as what has to be done, where and how it has to be done. In an employment relationship, everything above is disclosed to the employee, if a person maintains sovereignty over these things it would imply self-employment.
If the client can move the contractor as per his priorities or employ important control over how they perform their duties (through monitoring, supervision, checking and appraisal) as against full freedom over how to complete a project, then they would be identified as employed instead of self-employed.
What other factors contribute to HMRC’s decision?
The directives that surround whether your contract comes inside or outside IR35 are extremely difficult and will be based on the contract in question and your working practices. It is significant to remember that HMRC can evaluate everything to establish if you are an individual director or an employee of your own company.
Below are a few factors which HMRC will take into consideration when determining your status:
- Employee benefits: As a contractor, you are not eligible for employee benefits such as holiday, training courses and sick pay, pension contributions and annual staff parties.
- Independence: Willing to work freely on your own or are you managed by your client? Contractors will often work freely, whereas permanent employees are managed.
- Financial aspects : Workers employed permanently by a company will hardly be taking a financial risk to be at work. However, being an individual entity means that contractors may have to buy their own equipment subject to the length and rate of the contract in question could leave you out of pocket.
- Termination of contract: Broadly speaking, permanent employees will have a notice period, but as a contractor, your client will often have the option to terminate the contract immediately if they desire.
As a criterion, any contract which poses similarities to a full-time employee and employer is subject to be deemed inside IR35.
What are the consequences of being inside IR35?
If you are seized by the legislation then IR35 will prohibit you from using traditional tax-planning techniques whether small salary and high dividends in order to reduce your tax obligations. Instead, it will need you to pay almost all of your fee income out as a salary which means you’re taxed in a similar manner as a permanent employee.
The IR35 status is ascertained by checking at whether the engagement would be one of employment or self-employment in the non-existence of the service company.
How will IR35 impact on my take home pay?
If you’re inside IR35 it means, you will be entitled to full tax and National Insurance contributions as against the salary and dividend structure if you’re outside. You will also require to calculate a deemed payment which is your annual turnover excluding your 5% allowance for the running costs of your company.
Looking for more advice?
The rules encompassing IR35 aren’t always simpler to follow, that’s why it’s significant to obtain the best advice possible. For more insights into your IR35 status, you can use HMRC’s free IR35 Checker for getting more information.