IR35 – what is it?
The Intermediaries Legislation, IR35, deals with disguised remuneration or “off payroll” work.
Its core aim is to stop people setting up personal service companies to avoid paying income tax and NI (and rather pay tax on dividends) even though they are essentially an employee.
This has been an area that HMRC have been looking at in great detail over the last few years.
When deciding whether a contract amounts to employment (a contract of service) or self-employment (a contract for services) there are three essential principles to consider, known as the principal ‘tests of employment’
- Control: what degree of control does the client have over what, how, when and where the worker completes the work
- Substitution: is personal service by the worker required, or can the worker send a substitute in their place?
- Mutuality of obligation: the employer is obliged to offer work, and the worker is obligated to accept it.
Other factors taken into account to determine whether you are caught by IR35 include: the contract type, whether you are taking a financial risk, if you are ‘part and parcel’ of the engager’s organisation, being in business on your own account and provision of equipment.
All of this evidence is taken into account, and if the balance of probabilities is that the worker is an employee then IR35 applies. So, for example, if a worker has a right to send a substitute in their place, personal service is not required and IR35 cannot possibly apply.
HMRC also have the power to look back at contracts for at least six years to see if contractors/company directors fall within IR35 rules.
Who is currently responsible?
It is currently the responsibility of the individual to assess whether they are within the IR35 rules – if they are then a deemed payment of the tax, employers’ and employees’ NICs are payable to HMRC.
How do I assess if someone is ‘inside’ the rules?
HMRC have created a tool, known as Check Employment Status for Tax, or CEST. It asks various questions to determine the employment status of the relevant person – the tool can be found here. There has been significant opposition to this tool as it is believed that it is too simplistic.
Recent changes
HMRC believed that a large proportion of contractors in the public sector were essentially disguised employees.
From 6 April 2017, they shifted the responsibility for determining IR35 status onto the end client (i.e. the employer/engager). Where a contractor is deemed to be ‘inside’ IR35, the client must deduct employees’ NICs and income tax from the contractor’s pay, as well as paying employers’ NICs.
Further changes to be made
From 6 April 2020, the responsibility for deciding employment status will move to the private sector (only for non-small companies with more than 50 employees).
This is a relatively complex area of taxation, so please feel free to get in touch if you have any questions.
