IR35 regulation continues to be an important subject in the contracting world, especially because it can have a serious impact on businesses across the country. This piece of legislation can be confusing to fully understand and to be sure whether you’re caught within it or not. At Gorilla Accounting, we can help you sort out the IR35 issue once and for all and let you know where you stand.
In our wide range of services, we offer answers and advice to your most pressing questions, so have a look at what you should be asking your accountant when it comes to IR35.
Am I Affected by IR35?
Knowing if you’re caught inside IR35 is vital, as this will determine your course of action. While, until recently, only contractors were responsible for establishing their IR35 status, the new reform means that hirers can determine this status instead. In addition, agencies are responsible for deducting tax from contractors’ pay and risk being liable for unpaid taxes and penalties if the contractor is working inside IR35.
IR35 was introduced to fight tax avoidance by workers who supply services via an intermediary, such as a limited company, but who would be considered an employee if the intermediary wasn’t used. This is also known as a worker being a ‘disguised employee’. If they are not caught by IR35, a worker can provide services to clients as a one-man limited company, receive a large part of earnings and dividends but save on income tax and NI deductions. So far, HMRC estimates that the IR35 reform in the public sector, implemented from April 2017, has generated £410 million in additional revenue for the Treasury.
IR35 status is determined through several status tests. In essence, if you’re a contractor, freelancer or consultant working on your own account, the legislation won’t apply to you; but if you have the same benefits, responsibilities and control as a permanent worker, then you’re likely inside IR35.
If you want to know for sure whether you’re working within IR35, seeking the advice of contractor accountants can help put your mind at ease.
What is a Personal Service Company?
A term coined by HMRC back in April 2000, personal service companies refer, essentially, to a contractor’s own limited company. They’re often considered to be a UK-registered limited company where the contractor acts as the director, and where he or she is the sole shareholder (in some cases, the contractor will be an equal shareholder to their spouse in a 50/50 division). Additionally, in a PSC, the contractor also manages and controls the company’s bank account and provides professional services to clients via this company.
What Are My Payment Options If I’m Inside IR35?
If you’re found to be inside IR35, then you can’t avoid PAYE and National Insurance contributions. Generally speaking, if this is the case for you, you have three different ways to make your payments:
- PAYE – This is paid directly by your agency, usually on a reduced hourly rate.
- Umbrella – Paid by the umbrella company on your hourly rate after deductions.
- Remain as a PSC – Both tax and National Insurance would be deducted based on payments are made to your personal service company – or a contractor’s own limited company.
How Will the Private Sector Be Affected?
The off-payroll changes to the IR35 regulation will be rolled out to the private sector as well, as announced by the Chancellor in the 2018 Autumn Budget. This reform has not been great news for contractors working in the private sector, but it will only take effect in April 2020; in addition, the changes, which will be the same as the IR35 rules impacting the public sector, are only applicable to contracts where the end client is a medium or large business. Just like in the public sector, end clients will usually be the ones responsible for determining the employment status of contractors.
But what constitutes a medium or large business? According to Companies Act 2006, this means companies that satisfy two or more of the following requirements: annual turnover inferior to £10.2 million, a balance sheet total of less than £5.1 million and fewer than 60 employees.
If Within IR35, Do I Get the Same Benefits as a Permanent Employee?
It’s perfectly logical to wonder if you’re entitled to the same benefits as a permanent employee if you fall within IR35. Unfortunately, this is not the case if you’re working through a personal service company; if you operate via an umbrella company, on the other hand, you will have some rights; this will depend on the company you choose to work with. We offer umbrella services for contractors here at Gorilla Accounting, so get in touch if you’d like to learn more about how we can help.
Which Factors Contribute to HMRC’s Decision?
There are several rules that help HMRC determine whether or not a worker is inside IR35; knowing which factors the government takes into consideration can help you to learn more about your current status and what you can do to prevent issues. These factors include, but are not limited to, the following:
Control – If your client can move you according to their priorities or have a good degree of control over your duties or how you complete a project, then you are considered to be employed, as opposed to self-employed.
Right of Substitution – If you have the freedom to choose whether you’re working on a project or hiring someone else to do it, then you’re not considered an employee. After all, if you’re allowed to provide a substitute to finish your work, then you’re not under the direct supervision – and control – of your client either.
Mutuality of Obligation – There is an expectation for permanent employees to continue providing services and doing work, which is another way for HMRC to tell whether or not someone is self-employed. If you are, then you will work on a specific project you’ve been contracted to do but your client won’t have the expectation of further work beyond that – unless otherwise specified, of course.
Contract Termination – Most employee-employer relationships require notice periods in order for a worker to terminate their contractor; however, if you’re self-employed, then you’ll be able to do so at any time without having to give notice.
More Than One Job – Are you allowed to do other work? If yes, then this is a major factor in determining whether or not you’re self-employed, as employees don’t usually have the right to work for several clients at once.
How Will My Salary Be Affected?
It goes without saying that this is one of the most frequently asked questions about IR35, given that knowing how your take-home pay will be affected if you’re caught within IR35 is of the utmost importance. If this legislation applies to you, you will be liable to pay full tax and NI contributions, but you’d be entitled to a salary and dividend structure if otherwise.
You can also make use of our contractor tax calculator today, which will help you to calculate your take-home pay.
I Thought I Wasn’t Within IR35, But I Am – Now What?
We can understand the frustration – and worry – of thinking you’re outside IR35 and have the freedom to operate as independently as you want, only for that to be wrong. If you’ve been taking advantage of the tax benefits awarded to those working outside IR35 but HRMC is now challenging your status, there are several things you can do.
First of all, you can agree with the decision and pay back the taxes and interest you owe; for many contractors, this isn’t a feasible option, since, more often than not, they will have to pay a pretty hefty sum. You can choose to disagree with HMRC and argue your case instead; should you follow this path, make sure you’re in the right and fully prepared.
If you lose, your tax bills will be higher, as all of your income from contracting will be treated as if you’ve been permanently employed from the beginning. This can be very costly to you so, in order to avoid such an issue, it’s best to seek specialist advice from a professional accountant to be completely sure you’re right.
Questions to Ask Before Hiring an Accountant
If you’re considering hiring an accountant to help you deal with IR35, then it’s important that you know you’re getting the right person or company for your business. After all, while it’s clear that contractors can benefit greatly from specialist advice when it comes to this legislation, it’s also important to note that not everyone will be able to help the way you hope.
By asking the right questions, you can make a decision easier:
How much experience with IR35 do you have?
Asking this question will allow contractors to understand whether an accountant or accountancy firm is the right choice for them – if they don’t have much experience with IR35, then it’s best to go with someone else.
How ready are you for the IR35 reform?
Another thing to keep in mind is whether the accountant is prepared for the IR35 reform of the private sector. An accountant who is up to date on the legislation will know how to deal with HMRC and what to advise when it comes to these upcoming April 2020 changes.
How many IR35 enquiries have you handled?
Equally vital is understanding how many IR35-related enquiries the accountant has actually worked with and how he or she handled them. After all, IR35 is a complex piece of legislation and there is no easy way around it; the last thing contractors want is to worry about whether their accountant can actually deal with it.
What other services do you offer?
Understanding IR35 is vital, but contractors often need their accountants to offer other types of services as well. In order to fully benefit from having a dedicated accountant, contractors need to make sure they’re entitled to a range of services, whether you’re a limited company owner, are self-employed or operate through an umbrella company.
How much experience do you have with my industry?
Contractors and freelancers work with many different clients, so it’s important that they can have the peace of mind of knowing their accountant fully understands their specialist sector. This way, contractors can receive the best advice and help, tailored to the requirements of their business and of their industry.
What type of clients do you usually work with?
The answer to this question can help contractors realise if an accountant can actually meet their needs. A company that specialises in contractor and freelancer accountancy will be the best bet, since they will be more knowledgeable and experienced in the intricacies of this type of work.
What type of support can I expect from you?
Another key question contractors will want to ask. Before choosing an accountant, it’s crucial to understand exactly how they can help. Will they provide same-day responses? Will you receive unlimited support, be it in person, by email, Skype call or on the phone? Once contractors know what to expect from their accountants, it will be easier to make a decision.
How Can Gorilla Accounting Help?
If you’re looking for accounting for contractors, we can help. Our specialist IR35 Contract Review provider for contractors, freelancer and consultants, Larsen Howie, will be able to answer all of your questions and help you to understand the intricacies of IR35 and its reforms. You can find out more about this in Larsen’s dedicated page.