IR35 legislation has been designed to protect against disguised employment and it’s intended to prevent workers who would usually be seen as an employee avoiding tax liabilities by working through an intermediary, such as a limited company.
If an individual’s contract and working practices match that as an employee, it’s likely that their engagement would be seen as caught by IR35. If the locum has a genuine business to business engagement and would not be deemed as an employee, then their engagement should be seen as outside IR35.
How does IR35 impact Locums?
IR35 can have a big impact on locums working through a limited company, as it determines how you should take funds from the limited company.
If your contract is outside IR35, you get the benefit of choosing a tax efficient salary and you can then top up your income by declaring dividends from the company profits.
If caught by IR35, the employee would take most or all of the company income as salary. It’s worth noting that this is subject to the normal tax and national insurance deductions and is in most cases, less tax efficient than when working outside of IR35.
How is IR35 determined?
There are a number of factors that can determine if an engagement would be seen as IR35 caught but there are three main tests to consider:
Direction and Control – How much control the worker has over their project and the work they complete is a key factor. If the client controls and directs the worker in how they complete their work, then this is an indicator that the individual may be caught by IR35 and seen as an employee.
Right of Substitution – If the worker can substitute themselves with another suitably qualified person to work on the project, this is an indicator that the engagement could be outside IR35. An employee would most likely not be able to replace themselves with someone else.
Mutuality of Obligation – In an employer and employee relationship, there would be an expectation that work is continued to be offered to the employee from their employer. If this is the case, this is another indicator that the engagement may be inside IR35.
The actual general working practices should be considered. If the worker is part and parcel of the company and behaves like an employee, this would indicate as being caught by IR35. For example, this could include the worker appearing on organisation charts and attending team meetings with other employees.
As a private sector worker, if you’re caught by IR35, you will be responsible for making the relevant PAYE/NI deductions through the limited company. In the private sector, an employee caught by IR35 will be required to pay themselves a salary set at 95% of the contract revenue, less any allowable expenses. The allowable expenses that can be deducted from the salary calculation are professional indemnity insurance, childcare, pension contributions and employers NI.
Any other allowable expenses, such as accountancy fees can be paid from the taxable profit generated from the 5% allowance. However, it is important to note that travel, accommodation, meals and mileage are not allowable, and these costs would be expected to be suffered by the employee.
The IR35 status should be determined by the contractor in the private sector and it is their responsibility to review this and correctly determine their status.
If the worker provides services in the public sector, the public authority or agency is responsible for deciding if IR35 applies. The worker can provide the public authority with information to help them make a decision.
The controversial measure is expected to be under the spotlight at the Autumn Budget Statement which will be announced on Monday 29th October 2018. Chancellor Philip Hammond will unveil a series of public spending measures during this event.
Remember to speak to your accountant before acting on the above advice. To read the full article – head over to Simply Locums.
For more information, get in touch with Gorilla Accounting on 0330 024 0406 or email firstname.lastname@example.org.