On 06 April 2021, delayed a year due to Covid 19, the Off-Payroll Working rules (IR35) changed, rules designed to help HMRC assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee.
Contractors who work through their limited company enjoy a level of tax efficiency; they don’t usually get employee benefits (like holiday, sick pay, pension) but have flexibility and control over their work.
IR35 sets out to ensure that individuals who work as employees but through an intermediary or a personal service company pay their fair share of tax.
Why – IR35 helps HMRC tackle tax avoidance through off-payroll working
HMRC introduced IR35 (the ‘off-payroll working rules’) in 2000 to tackle ‘disguised’ employment where a contractor, a ‘disguised’ employee, seeks to take advantage of the tax efficiency of working through a limited company, when really they are an employee were they not working through their company.
For employers the benefit is that they don’t have to pay employers’ National Insurance contributions or give contractors employee benefits. The benefit for contractors is tax efficiency.
IR35 is an employment status test for tax, employed or self-employed:
- ‘inside IR35’ points towards employed – you are an employee with income tax and National Insurance burden as employees do.
- ‘outside IR35’ points towards self-employed – you enjoy the tax efficiencies and risks that self-employment brings
The rules and legislation is complicated to understand, even HMRC seems to struggle.
When – does IR35 apply?
The first thing to do is to work out the employment status of the person providing the service – employed or self-employed – as IR35 applies to workers providing services through an intermediary.
HMRC say that the off-payroll rules apply (inside IR35) if the contractor “would be an employee if there was no intermediary”, the intermediary usually being the contractor’s limited company or personal service company.
A personal service company, a limited company where the sole director, the contractor, owns most or all of the shares. An intermediary may also be a partnership or individual,
The contractor then delivers services to clients directly or through the intermediary.
What does IR35 status depend on?
IR35 status tests usually relate to supervision, direction and control. In reality, IR35 status hinges on IR35 case law and employment legislation.
Who – works out IR35 status?
Medium and large size clients are responsible for working out the contractor’s employment status and should give reasons behind their decision in a Status Determination Statement, which can be can disputed by the contractor.
If the contractor falls inside IR35, employee, the client paying the contractor needs to deduct tax and NICs and report it to HMRC.
Small businesses are exempt so the contractor working for a small client is responsible for working out their own employment status.
Small businesses meet two of the following criteria, for two consecutive financial years:
- annual turnover of no more than £10.2 million
- balance sheet total of no more than £5.1 million
- no more than 50 employees
End clients need to show they’ve taken reasonable care when working out IR35 status, as HMRC will hold them responsible for getting things wrong.
In general, IR35 won’t apply if the contract is for services rather than employment:
supervision, direction, control –how much say does the client have over how work is completed
- substitution – can someone else complete the contract, or is it personal
- mutuality of obligation (MOO) – is there an obligation to offer work, and does it have to accepted
Other factors might be
- equipment – is equipment provided by the client
- financial risk – self-employed contractors usually take a degree of financial risk
- the way you’re paid – self-employed people might be paid on a project basis
- exclusivity – does the contractor work for other clients
- intentions of the parties – the contract should make it clear as to one of supplier and customer – but must be genuine
Make sure you clarify your relationship with the hirer before you start the contract by considering all of these principles.
Again, before you start working, you should seek expert IR35 advice. For further details and the impact of IR35 on the Construction Industry contact Guy Thomas or call 01244 354812