How does IR35 affect you and what do you need to do stay compliant?
Here's your guide to IR35, written by experts at the UK200Group:
IR35 – Otherwise known as the intermediaries legislation - is a tax legislation combating ‘deemed employment’. Anybody who works through an intermediary, such as a limited company, needs to consider IR35 each time they seek a new contract. If HMRC finds that an individual would effectively be an employee of their client if the intermediary, or limited company, were removed from the equation, that individual would fall within the scope of IR35. Being caught by IR35 subjects you to employment taxes and can reduce your net income by 20% or more.
How IR35 affects you Genuine contractors forego the job security and employment rights that accompany permanent employment to enjoy the flexibility that contracting offers, which includes tax advantages.
The individual’s HMRC targets attempt to gain the tax advantages of contracting without taking on the risk. Consequently, as a limited company contractor, you have to take measures to prove that you are genuinely in business on your own account.
How is IR35 status determined? IR35 is all about establishing employment status, which involves considering employment legislation and case law. This is highly complex, although your accountant, or a legal professional expert in IR35, can help assess your status.
Essentially, there are three key ‘tests of employment’ to be aware of:
Control – Does the client have control over how the worker carries out the work?
Personal service – Is the worker required to provide services to the client personally?
Mutuality of obligation – Is the client obliged to offer work and is the worker obliged to accept it?
How you can stay compliant with IR35 Working in the private sector, you need to assess your IR35 status and tax yourself. If HMRC decides IR35 applies and you have not been paying the appropriate amount of tax, you will receive a bill for backdated taxes, penalties and fines. In famous IR35 cases, this sum has been well into six figures.
You’re advised to acquire a professional contract review for each contract you undertake. This is one of the services that the UK200Group offer to their contractor clients, as explained on page 11 of their guide (see link below).
If you are caught by IR35, income tax and National Insurance Contributions (NICs) need to be deducted from your income. The most straightforward way of doing this is to apply PAYE to your earnings.
What you need to know about IR35 HMRC’s tax yield from IR35 has consistently fallen short of its targets. So, from April 2017, enforcement of the legislation in the public sector has changed, with new responsibilities placed on public sector organisations engaging contractors. This will be extended to the private sector from April 2020.
What this means for you You may now encounter challenges contracting for a public sector client that you wouldn’t face in the private sector. These could include:
Receiving your fee via your client or agency’s payroll
Paying tax at source via Pay As You Earn (PAYE)
Being asked to work inside of IR35, regardless of whether the legislation applies
The key changes affecting you
Hirers are responsible for assessing the contractors they engage for IR35. So, unlike IR35 in the private sector, contractors are no longer responsible for determining their own status.
If the contractor is caught by IR35, the party closest in the supply chain to the contractor (the agency if present, otherwise the client) has to operate PAYE on their income, meaning income tax and NICs will be deducted at source.
If HMRC successfully challenges a contractor’s deemed IR35 status, the party closest to the contractor will be liable for backdated tax, penalties and interest – this risk may discourage many organisations from engaging contractors outside IR35.
If it can be proven that the hirer didn’t take ‘reasonable care’ when evaluating the contractor’s status, the hirer may assume this liability.
How to respond Tax liability risk is a lingering threat for hirers and agencies, and your biggest challenge may be persuading them to hire you outside of IR35. This is why actively contributing to your status evaluation is encouraged.
As you would in the private sector, seek a professional contract review. Your expert can also help negotiate terms into your contract to minimise any risk to your agency or hirer.
This extract was taken from the practical guide to 'Running a Limited Company'. It was reproduced with permission from UK200Group and written by experts in the UK200 Freelancers & Contractors Group. Find out more about the UK200Group here: https://www.uk200group.co.uk/
The UK200 Freelancers & Contractors Group offers a contract review service and specialist IR35 compliance advice.
It's worth taking advice before you start work to ensure you set up and maintain your accounting records, including expense receipts, in the right way. Set up costs can also be tax deductible under certain circumstances. The experts from the UK200Group explain more:
As a contractor, you'll need to budget for tax, insurance, professional fees, pension and for periods where you aren't earning such as holidays and sickness.
Here's your guide to budgeting for your limited company, from the experts at the UK200Group: