fbpx

Skip links

IR35: What is it and are you affected?

IR35 is HMRC’s intimidating term for “off payroll working”. This is essentially any work engagement where an intermediary such as a limited company owned by an individual takes on a contract that under any other circumstance would be an employment. This would be done generally to reduce taxes for both parties.

What are the IR35 rules

IR35 rules vary depending on the contract that the contractor and client have agreed upon. HMRC will investigate all aspects including creative control, time management, holiday allowance procedure and so forth to make a ruling on whether you comply or not. Whilst this may sound confusing, the general contract based points to look out for are below, and HMRC does offer a Check Employment Status for Tax (CEST) tool to help you formulate a personal opinion and of course you should contact your tax advisor for professional advice one way or another.

In general, IR35 won’t apply if the contract is for services rather than employment. To understand that you should consider whether the contract specifically mentions these principles:

  • Supervision, direction, control – this relates to how much say your client has over how you complete your work. For example, if you must work at certain times, this implies employment.
  • Substitution – could you bring someone else in to complete the contract, or do you need to do the work yourself? If you can’t send someone else, you’re could likely to be within IR35.
  •  Mutuality of obligation (MOO) – is there an obligation on the employer’s end to offer work, and do you have to accept it? This is called mutuality of obligation, and if an element of it exists, the contract may fall inside IR35.

Other HMRC considerations:

  • Equipment – If you own your own equipment or use company property.
  • Financial risk – Are you responsible for your own financial risks? Do you have indemnity insurance?
  • How you are paid – Self-employed people are normally paid on a project basis, which might mean when the work is completed or at project milestones.
  • ‘Part and parcel’ of the organisation – If contractors become a part of the company’s structure, with people reporting to them for example, this could point to employment rather than self-employment.
  • Exclusivity – Do you work for other clients? Typically, the self-employed can work for multiple clients at once.
  • Business proof of operations – Essentially this determines whether you’re actually running your business as a business. If you have things like a website, dedicated office space, and even employees, you could be seen as operating a business and not offering your services in the same way as an employee.

Is IR35 in effect?

Yes, and in fact as of 6 April 2021 an IR35 reform came into effect increasing the pressure HMRC puts on potential IR35 candidates.

Who is required to check if you are inside of IR35?

This will depend on what kind of company that you are dealing with:

Public/Medium to Large businesses- In this case the onus is very much on the client (The public or medium/large company to check this).

Small Companies- In this case the onus is on the intermediary to check this.

You are classed as a small business if you are within two out of three of the following thresholds:

  • Below £10.2m in turnover
  • Balance sheet total below £5.1m
  • Less than 50 employees

How to legally carry on as a contractor inside of IR35?

In this case the intermediary would have to be set up as an umbrella company where the individual takes their entire income as a salary, reducing the benefit to £NIL. This should be checked to make sure that the client that pays the umbrella company pays the employer’s national insurance contributions and holiday pay otherwise this would be an unfair benefit in favour of the client.

When might I be checked and what if I am found inside of IR35?

You can be checked at any point by HMRC if they open an inquiry against you which is completely at their discretion.

If you are found inside of IR35 HMRC will demand back taxes in the form of income tax and national insurance with added interest.

Final Thoughts

  • If you think that you are inside of IR35, you need to consider setting up an umbrella company, or working for the company as an employee in your own right. This gives you added protection under the company and employee rights such as holiday pay and possible severance if you are let go from the company.
  • If you are not sure whether you are in or out of IR35, you can use the (CEST) tool to help you formulate a personal opinion.
  • You might also consider discussing this with your tax advisor to be safe.
  • If you are outside of IR35, make sure that your contract is set up to be transparent and use language that proves that you are outside of IR35, should you ever be investigated by HMRC.