IR35 (also known as the Off-Payroll Working Rules) was created to assess whether someone is a genuine contractor for the purposes of paying tax rather than a “disguised” employee. HMRC introduced IR35 for the purposes of tackling “disguised employment” to ensure that contractors were not taking advantage of the tax efficiency that comes with working through their own limited company, when for all intents and purposes, they would be deemed an employee were it not for the fact they were working through their company.
In its simplest form, IR35 is an employment status test for tax. Currently, there are different rules for public sector and private sector contractors.
IR35 in the public sector – In the public sector the hirer is responsible for determining whether the role falls inside or outside the scope of IR35. If the role falls inside, it is the responsibility of either the hirer, agency or another third party who pays the contractors to deduct tax and NIC’s and report to HMRC.
IR35 in the private sector – Currently in the private sector, it is the contractor who is responsible for determining whether the role they are performing falls inside or outside IR35.
What’s happening in April 2021 – Having previously been delayed from April 2020, due to the Coronavirus pandemic, the roll out of who will make the status determination of the role in the private sector will change. Whether or not the role sits inside or outside the scope of IR35 will now be determined by the Hirer, matching the rules applied already to the public sector.
Inside or Outside IR35:
- Inside IR35 – if your role is deemed “INSIDE IR35” your assignment points towards employment. Therefore, for HMRC purposes, you are viewed as an employee and will be subject to income tax and national insurance deductions in the same way an employee of the organisation would be.
- Outside IR35 – if your role is deemed “OUTSIDE IR35” your assignment points towards self-employment. Thus, you can enjoy the potential tax efficiency that comes with self-employment.
IR35 checklist
The status determination of whether a role is inside or outside the scope of IR35 status depends on a wide range of conditions. The ones most commonly considered are those relating to the elements of supervision, direction and control, substitution and mutuality of obligation within the role.
HMRC encourages the use of a tool called CEST (check employment status for tax) when checking whether IR35 applies to a contract. Whilst undertaking the CEST test does not absolve the hirer from legal challenge, HMRC have said that if answered correctly and in line with the reality of the arrangements, the status decision it produces can be relied upon.
What are the key elements? It is important we break down parts of the test, to try to help provide some clarity around the various factors:
Supervision, direction & control – in order for a role to be more likely to fall “Outside IR35” the contractor must have absolute freedom over how the work is undertaken and completed. If the contract for a role specifies start and end times for example, or the number of days a contractor is to work, or guidance is provided over how the work should be completed then these elements are more likely to point towards employment and therefore be deemed “Inside IR35”.
Substitution – This looks at whether or not the Contractor undertaking the role would be able to send a substitute to complete the work instead of themselves. If the agreed contract states that the client is happy for someone else to provide the services to complete the work if the original engaged contractor is not available this would lean itself towards falling outside IR35. However, the clause has to be genuine as the contractor should know which skilled contractors they would ask if a substitute was required. If the end client would not be happy for a current contractor to provide a substitute, then this would suggest a status of employment.
Mutuality of obligation – This is a key test when determining the IR35 status of a role. If the client is obliged to offer specific work and to pay the contractor, and, the contractor is obliged to take the work, then this would suggest a relationship of employment, and therefore inside the scope of IR35.
Whilst these factors are important, others will also be considered in order to build a fuller picture and try and reflect the reality of the role. These are things such as whether the contractor provides their own equipment or uses that of the Hirer, how payment is made to the Contractor and the financial risk held by the Contractor providing the services.
What to do now?
If you are currently contacting in the private sector, speak to your line manager about undertaking a Status Determination for your role. Whilst this change will only affect Contractors working through a PSC, all roles should have a status determination associated with them. If you are a Hirer who currently has contractors working within their organisation, you should undertake the status determination using the CEST tool and communicate the outcome through your supply chain.
It is difficult to summarise tax legislation so please do contact LAW Absolute if you have any questions around IR35 or take independent tax and legal advice.
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