As a contractor, IR35 will have been on your radar for the past two years and making sure that everything you do is IR35 compliant is high on your priorities.

If you are self-employed, it is important to know where you stand with IR35. In short, IR35 is the name given to the rules surrounding off-payroll working. It is in place to assess whether someone should be paying tax as an employee or as self-employed.

It was created to ensure people weren’t unknowingly operating as self-employed when they should be paying tax as an employee. The consequences of getting it wrong can be very serious.

It’s important to keep on top of the legislation and understand the terminology, as well as explore options which you may have read elsewhere. In this blog post, we talk about the difference between being inside and outside IR35, as well as the idea that forming a consultancy with other contractors can help you avoid IR35 – and why this might not be the best idea.

What does inside and outside IR35 mean?

IR35 is a piece of tax legislation which looks to determine a genuine business from what is called a “disguised employee”. It targets limited company contractors who may be working as an employee of their end client rather than providing a genuine business to business service.

IR35 legislation seeks to reclaim the additional PAYE tax and NICs that they would have paid as an employee.

When explaining IR35, people often use terms “inside” and “outside” IR35. This indicates your IR35 status as being a genuine contractor (outside) or an employee for tax purposes (inside).

The terms reflect whether you are operating within the legislation’s scope or not:

The meaning of Inside IR35

–        To be ‘inside IR35’ means that you are considered, for tax purposes, an employee of your end client and therefore subject to PAYE.

–        If you are operating ‘inside IR35’, you need to ensure that the appropriate taxes are being paid.

–        This usually involves a ‘deemed payment’ of income tax being made at the end of the tax year, which your accountant will help you with. You should ensure that your status is reassessed in the event of a change in your working practices, and/or when you begin a new contract.

–        If engaged to the public sector or medium-large private sector business, the fee-payer (usually recruitment agency) will be required to deduct your tax and NICs at source.

–        However, many agencies and clients are not set up to manage contractors through payroll, and therefore many will only engage you via an umbrella company, which acts as your employer.

If you find yourself under investigation and an IR35 enquiry finds you ‘inside IR35’, HMRC will raise a determination for the income tax, NICs and interest that should have been paid during the period in question, as well as a potential penalty. This can run into the tens of thousands of pounds.

The meaning of Outside IR35

–        To be ‘outside IR35’ means that you are operating as a genuine business, and therefore operating outside of the IR35 rules.

–        If you are operating ‘outside IR35’, you are able to pay yourself a salary, draw the remainder of income as dividends, and remain responsible for your taxes as usual.

–        If you are working in a public sector or medium-large private sector, your end client is responsible for determining your status. If they deem you as ‘outside IR35’, you will be paid your fee as normal and you will be responsible for managing your taxes as you usually would.

Am I inside or outside IR35?

For both public sector contractors and private sector contractors providing services to medium-large organisations, your end client is responsible for determining your status.

They will likely use the CEST tool from HMRC to determine this, or an independent service.

If you find yourself contracting for a client who simply places their contractors inside IR35 to avoid admin or liability concerns associated with the rules, this is not compliant with the legislation.

Others place contractors based on their role, such as determining that all nurses are ‘inside’ IR35. Although HMRC has deemed this appropriate, it is fraught with issues when it comes to compliance with the legislation.

For private sector contractors working for small end clients, you remain responsible for your status. If you do need any assistance in determining your compliance, Gorilla can help.

We work with partners who offer an IR35 Review which includes:

  • A consultation with experts who will advise you on your position regarding IR35.
  • A quick, conclusive status result with all the support needed to guide you through the reform.
  • A comprehensive report that pulls through the notable positives or negatives of your engagement.
  • A concise list of recommendations to improve compliance.
  • Further, detailed information about the IR35 legislation

By obtaining an independent status review you are showing that you are taking due diligence in understanding your IR35 status. At Gorilla Accounting, and in partnership with Kingsbridge, we’re pleased to provide a comprehensive IR35 review service for contractors.

The way you provide your services is crucial, and whilst HMRC usually begin an enquiry by looking at the contractual terms, they will seek to clarify the terms directly with the end client.

If your contract does not reflect reality, any positive elements of the agreement would have very little bearing in an IR35 enquiry. You should therefore always consider a review of your working practices when determining your status.

Can contractors band together to work via small consultancies to bypass IR35?

Recently, some contractors have read online about structuring a ‘consultancy’ to bypass IR35 legislation. The hope is that such a structure puts beyond doubt that ‘personal service’ is not required and so the IR35 rules of April 2021 are unlikely to apply.

The IR35 regime investigates the contractual nature of the relationship between a worker and the end-user. This is to establish whether a contract of employment would exist between them in the absence of the intermediary.

The nature of the relationship (whether employee, worker or contractor/freelance) impacts a range of variables, including the legal protections enjoyed and how earnings are taxed.

One of the main benefits of working as a freelancer as opposed to being an employee is that a freelancer has the freedom to sort their tax affairs more tax-efficiently than a conventional employee.

HMRC has become increasingly aggressive in its attempts to investigate the tax affairs of purported freelancers in the past few years. This is to examine whether they are genuinely freelancers, or are ‘disguised employees’. This scrutiny is to recoup any tax or national insurance contributions that freelancers have avoided paying.

As HMRC have intervened in the tax affairs of freelancers, especially high-profile TV personalities, freelancers have adjusted their position to try and better protect themselves from HMRC’s investigations. One adjustment made by freelancers is to ‘band together’ to form small consultancy businesses. The aim of which would be to argue that they are exempt from IR35 rules “because the consultancy is small and they charge for services rendered rather than labour supplied”.

Forming consultancy companies could mean that a Managed Service Company (or MSC) is being formed, depending on the structure and mechanics of the relevant company.

Forming an MSC might be undertaken with the best of intentions, but forming a consultancy with other contractors to minimise exposure to the IR35 rules could do more harm than good.

When the government first introduced IR35, MSCs fell under the legislation. However, as it became clear that MSCs were not complying with the IR35 rules, HMRC took the decision to subject these organisations to a different, arguably more draconian tax regime.

One of the effects of this change was that MSCs were required to automatically deduct tax and National Insurance Contributions from all sums paid to workers.

This meant that instead of pushing themselves further into the embrace of the IR35 rules, workers were potentially pushing themselves further away by requiring their MSC to automatically deduct tax and national insurance from their wages and pay such to HMRC.

Working with Gorilla

At Gorilla Accounting, we work with you to ensure that all your tax payments are made in a way that maximises your earnings whilst still being IR35 compliant, so you have peace of mind that no HMRC investigations are coming your way.

If you’re looking to work with a new accountant and want to know more, you can contact us today by filling in our online form, here, or calling us on 0330 107 9670 to speak to us about your options.