The Importance of IR35 Assessments

At the time of writing IR35 has been law for almost a quarter of a century. Seasoned contractors will already be familiar with the nuances and frustrations of this piece of legislation, but it can be something of a minefield for those new to contracting.

Over the years there have been numerous revisions and reforms to the IR35 system which increases the complexity and makes it harder for contractors to stay abreast of the changes and correctly determine the IR35 status of their contracts and remain compliant.

In this post we’ll cover the IR35 basics as well as how a professional IR35 assessment can help you to be confident that your IR35 contract status has been correctly determined, and what the benefits are of doing that.

What is IR35?

IR35 is a piece of tax legislation that’s also referred to as the ‘off-payroll working rules’ or ‘intermediary legislation’. The IR35 rules apply to both the public sector and private sector and their main purpose is to prevent employers from engaging permanent employees on a contract basis – known as ‘disguised employment’ – which has serious implications for HMRC from a tax perspective with economic losses estimated at £1.2 billion annually due to workers being incorrectly classified for tax purposes.

A permanent employee engaged on a contract basis can take advantage of the tax-efficiencies presented by self-employment through their own limited company to reduce their overall tax liability, and this results in a significant amount of lost tax revenue for HMRC. The employer also wouldn’t have to pay Employer’s National Insurance contributions, so a key objective with this legislation is to close the tax gap.

It also protects employees by ensuring that they receive the employment benefits that they are entitled to such as holidays, sick pay, maternity leave and employer’s pension contributions which they wouldn’t receive if they were genuinely self-employed.

How Does IR35 Work?

Following April 2021’s IR35 reforms, the responsibility for determining IR35 status sits with the end client or agency rather than the contractor in most cases when the end client classed as a medium or large business. As part of the IR35 status determination, they must produce a status determination statement (SDS) which outlines the contractor’s IR35 status and the reasons for reaching that decision.

If the end client is a small business (annual turnover below £10.2m, balance sheet total less than £5.1m, 50 or less employees) then the responsibility for completing the IR35 status determination is on the contractor.

Either way, it’s a good idea for contractors to undertake professional IR35 assessments, often on a contract by contract basis, to ensure that the status determination is accurate and avoid subsequent fines and penalties, whether it’s the end client or the contractors themselves that has the responsibility. It’s important to note that it’s the contracts and working arrangements that are what is assessed rather than the business itself.

There are 2 possible IR35 statuses, inside IR35 and Outside IR35., which ascertain whether the contractor is considered to be employed or self-employed for tax purposes.

Inside IR35

If you’re inside IR35 you are considered to be an employee and will pay your income tax and National Insurance Contributions through Pay As You Earn (PAYE). The main indicators of being inside IR35 are that you are managed as if you are a permanent employee and receive the same benefits as a permanent employee.

Outside IR35

If you are outside IR35 you are genuinely self-employed and work for your own limited company. End clients will pay you a lump sum to your business for your services and you then have the responsibility of paying yourself and fulfilling your tax obligations.

The main factors to consider when determining IR35 status are:

  • Control – If the end client has direct control over the service that you provide them, such as working location, working hours and how the service is delivered, the contract will likely be inside IR35. If the contractor has this control then it will likely be outside IR35.
  • The Right of Substitution – If you were unable to work on a contract due to injury or illness, for example, the contract would be inside IR35 if you were unable to provide a substitute to work on it as this would indicate a contract of employment. If you could use an employee of your business to work on the contract in your place, the contract would be outside IR35.
  • Mutuality of Obligation – A self-employed contractor will work on a contract with specified start and end dates. There should be no expectation of any further work by either party once the contract is completed. If there is, mutuality of obligation is present and the contract will be inside IR35. If there’s no expectation of any further work, it’s outside IR35.

What is an IR35 Assessment?

An IR35 assessment is an expert review of the contractual terms and working arrangements between a contractor and end client or agency to provide an IR35 status assessment to determine whether a contract lies inside or outside IR35.

What are the Benefits of an IR35 Assessment?

Over time, IR35 legislation has become more complex and an accurate determination of IR35 status is crucial for contractors to ensure they can operate as tax-efficiently as possible, mitigate financial risk and remain compliant with IR35 legislation. Read on for the main benefits of IR35 assessments for contractors.

Ensure You Are Compliant

Having a professional IR35 assessment conducted gives contractors an expert review of their contractual arrangements and terms as well as working arrangements and practices to give an accurate and clear determination of IR35 status.

This is important for contractors to have peace of mind that their IR35 status is accurately determined and they are operating within the law and paying the correct amount of tax and won’t incur any non-compliance penalties for misclassification, or for paying the incorrect amount of tax.

Optimise Your Tax Position

An IR35 assessment gives contractors an accurate determination of their IR35 status and knowing this is crucial from a tax perspective. If you are inside IR35, you are technically an employee and your taxes will be deducted at source through Pay As You Earn (PAYE).

Being outside IR35 and working through your own limited company is the dream scenario for contractors. When you’re outside IR35 you are genuinely self-employed and are working for, and paid by, your own limited company. This means you can structure your income in a tax-efficient manner to reduce your overall tax liability and increase take home pay while remaining compliant.

Mitigate The Risk of Legislative Changes

IR35 legislation is dynamic with updates and reforms a regular occurrence, not to mention revoked reforms. It’s not easy for busy contractors to understand and keep up with how these changes might affect their IR35 status and compliance obligations.

Having IR35 assessments when you take on new contracts ensures that you will always be a step ahead of the latest IR35 legislative and regulatory changes allowing contractors to operate with confidence knowing that they are compliant with the latest rules.

Reassurance for Your Clients

Having an IR35 assessment can help to reassure clients by showing them that you are proactive in correctly and accurately determining your IR35 status and it provides them with both clarity and transparency in terms of their tax arrangements.

This is especially the case when the contractor is engaging with a small business – the onus in this scenario is on the contractor to determine IR35 status, so by having a professional IR35 assessment, you are shielding the end client from potential compliance issues, penalties and liabilities as well as garnering trust and credibility and strengthening your relationship with them.

Get a Free IR35 Assessment from Qdos

There’s no denying that IR35 can be complicated but having your IR35 assessment completed by experts gives you peace of mind and the reassurance you need to help you pay the right amount of tax. With Qdos on your side, you know where you stand, and so does HMRC.

A Qdos IR35 contract assessment provides an expert overall opinion of your IR35 status based on the written terms and conditions of your contract between your limited company and your agency or end client. Qdos will point out clauses where HMRC may find issues and provide suggestions for positive changes and improvements which could be made where relevant so you can start your contract on the right footing.

Trust Qdos to guide you through the complexities of IR35 with precision and clarity. The usual price is £49 plus VAT. Get in touch with Qdos here for your free IR35 assessment.