As a contractor, you can’t have missed the constant stream of articles relating to IR35 (also known as ‘intermediary legislation’) in recent years. But what does IR35 mean for you and your assignments?
IR35, whilst puzzling to most, can’t be ignored – to ensure you’re paying tax correctly, you should understand it inside out. Here’s everything you need to know about the legislative measure.
IR35 basically determines whether a contractor’s work is ‘disguised employment’ or not. If the work completed for a client is the same as it would be if they were an employee, then the contract falls inside IR35.
This means that the employer will be required to pay Employer’s National Insurance Contributions and provide the contractor with employment rights. Also, the contract worker should be taxed like a normal employee, with Employee’s National Insurance Contributions and Income Tax deducted from their pay.
On top of this if they are in the public sector, they will only be able to claim on a limited range of expenses, and won’t be entitled to HMRC’s 5% expense allowance either.
Contracts deemed outside of IR35 are not subject to this, making it the more attractive way of operating. In order to class your assignment as falling outside the legislation in a compliant way, it needs to be accurately determined (and whether or not it’s you who reviews this will depend on what sector you’re in).
Public and private sector reforms
Up until recently, there was no distinction when it came to IR35 status in public or private sector engagements – it was always the contractor who needed to establish this. In April 2017, a reform meant that the responsibility now falls to the public sector body instead.
The number of contractors now considered inside IR35 and paying the associated taxes has increased, but the Freelancer and Contractor Services Association (FCSA) found that half of public sector bodies haven’t assessed the IR35 status of their contract workers.
A ‘blanket’ approach has been applied to the majority of cases, even though it’s legally required to review each assignment individually. Due to this, some contractors are now taking legal action and looking to reclaim any overpaid tax.
These reforms are expected to extend to the private sector as well, meaning determining the IR35 status of a contract will be the responsibility of the client. Currently, no decision has been made as to whether the private sector reforms will actually happen, or when. Some anticipate that they could be introduced as soon as April 2019.
The factors to consider
Whoever deals with making the decision on IR35 status will need to consider a number of factors, including direction and control, mutuality of obligation and right of substitution.
Direction and control basically establish if the client has any supervision over the contractor. Mutuality of obligation is whether or not the contractor is duty-bound to complete the project, and the client to offer more work after the contract has ended. If any of these things are part of the assignment, then it would be caught by the IR35 legislation.
It will also be deemed inside IR35 if it’s the client that chooses a substitute if the contractor can’t finish the work. Checking to see if your contract is IR35 compliant can help.
These factors will need to be accurately assessed, along with other considerations such as general working practices that indicate a contractor is an employee (if they appear on organisation charts, for example).
Determining your IR35 status
As the factors for establishing an assignment’s IR35 status are quite vague, HMRC has provided the Check Employment Status for Tax (CEST) tool to assist. This can be used for both public and private sector engagements.
Before you use the tool, you’ll need to have all the information about the assignment to hand. This includes your responsibilities, your operating structure, and if there are any benefits or reimbursement for expenses. You should also have knowledge on who decides what the required work is, and when, where and how it is done.
Unfortunately, this tool hasn’t been proven to be effective in all cases – in fact, 15% of people who have used it received inconclusive results. There has also been grievances around it because the test doesn’t take into account the mutuality of obligation factor, as HMRC have assumed it’s automatically present in every assignment.
Which operating structure should I choose?
With the lack of clarity around the IR35 legislation, deciding how to operate as a contractor can prove difficult. If your assignment is found to be inside IR35, then working under an umbrella company will generally be the most tax efficient route, but not in all situations. You can use a contractor tax calculator and also get an expert accountant’s help to figure out the best operating structure for you.
A limited company can still prove beneficial even if your assignment is caught by IR35. If you currently have any contracts outside of the legislation, these can still be put through your limited company. If you expect that future assignments won’t fall foul of IR35, then you can make your limited company dormant until then.
Let an accountant assist
Working out which way to operate, along with the necessary tax calculations, doesn’t come easy to most, especially with regular IR35 legislation updates. Our expert accountants can take this off your hands.
With our services, you can use them whether your assignment falls inside or outside IR35. Our umbrella company will deduct all the necessities for contracts inside the legislation, and we can also deal with everything required for the assignments you opt to complete under your limited company.
We will sort out your finances, from the Self Assessment to advising you on tax planning. And we do this compliantly, so you don’t have to worry about HMRC potentially penalising you in the future.
At Gorilla Accounting we take all the stress away from paying tax. To find out how we can do this for you, speak to a member of our team today.