What is IR35?

The question of IR35

What is IR35?

IR35 was introduced in April 2000 by HMRC to tackle the growing number of employees leaving their permanent roles, setting up their own businesses and then returning to perform their old role as a contractor to avoid paying tax and National Insurance at the higher rates. 

The legislation aims to ensure that contractors working essentially as ‘disguised employees’  pay the same level of tax through PAYE and national insurance as if the contractor were an employee.

What IR35 means for you as a contractor or freelancer.

Your IR35 status, which can vary from contract to contract, determines your tax position with HMRC.  If your contract is deemed to be “outside” IR35 you are free to determine your salary and dividend strategy to suit your own tax planning aims but if you are found “inside” IR35 then all of your earnings will be deemed to have been earned from employment and employment taxes will apply. An inside IR35 decision can also affect the expenses you can claim, dependant on you working in the public or private sector.

IR35 and the public sector

As of April 2017, the requirement to determine a contractors IR35 status moved from the contractor to their end client and the party paying the Limited company, often an agency is now responsible for effectively applying PAYE and National Insurance Contributions (NICs). Public bodies will now need to decide if they are engaging a contractor that is legitimately self-employed or whether they should be subject to PAYE and NICs like any other employee.

This change will mean many contractors will be brought within PAYE and NICs. This is likely to result in contractors facing larger tax bills as well as a need to revise their tax status and business structures.

As of 2018 there have been no changes to the rules with regards to Private Sector Contractors.

How to determine if your contract is inside or outside IR35

IR35 is a matter of employment law. There is no statutory test and each case is dependent on the individual circumstances and facts. To be outside of IR35 a contract and the contractors working practices need to demonstrate a lack of employment factors, they need to show that the contractor is in “business on his own account”. Case law has identified three key areas that would indicate the existence of an employment relationship, so it Is vital that to be found outside of IR35 these factors are shown not to be present.

• Control -  Are you able to decide how to carry our your tasks in order to achieve the project brief or do you have to follow instruction and take direction in order to achieve the task?
•  Personal Service – Say you’re ill can you send someone in to do your job on your behalf or do you have to personally carry out the work?
• Mutuality of Obligation – If you wanted to reject a task, are you obliged to take it or do you have a choice? If your end client can’t offer you work are they required to pay you still?

What happens if my contract is inside IR35?

If your contract is seen to be inside of IR35, you will have your earnings taxed in almost the same way as a PAYE employee. HMRC will require you to run a deemed payment calculation. In simple terms, 95% of companies turnover, will be treated as your deemed salary, and 5% will be set aside for the running costs of the company if you are a private sector contractor. If you are trading in the public sector the allowance for 5% running costs has been removed from April 2017, so 100% of your fees earned will be deemed as salary.

IR35 is complicated and if you are not sure.

We recommend speaking with an expert in IR35 legislation. Orange Genie Accountancy works alongside Bauer and Cottrell, IR35 specialists. Bauer and Cottrell will review not just your contract but importantly will look into the working practices between your end client and you the contractor. They will then be able to tell you if your contract would be seen to be inside or outside or IR35.

If HMRC does decide to review your status, Bauer and Cottrell will support you and put the facts to HMRC; they are yet to lose a case, so you know you would be in safe hands.

To find out more about Bauer and Cottrell or how Orange Genie Accountancy can help you with setting up your limited company, please call 01296 468 185 or email accountancy@orangegenie.com.