What’s the Latest on IR35?

There was great news for self-employed people in Jeremy Hunt’s recently delivered Autumn Budget Statement including a cut to class 4 National Insurance contributions and the abolishment of mandatory class 2 NICs which all equates to an increase in take home pay without impacting access to benefits.

In another tax break, full expensing was also made permanent meaning businesses can continue to take the cost of equipment they buy out of their pre-tax profits resulting in a lower tax liability.

And tucked away in the detail of the subsequently released Budget Document was confirmation of an IR35-related change regarding double taxation which will have a significant impact on self-employed people.

IR35 Double Taxation

It’s been a long time since the inception of IR35 and the controversial scheme is still being refined to this day. A Government consultation into double taxation related to IR35 recently concluded and the Budget Document has confirmed that the proposed changes will be implemented, most likely at the start of the new tax year in April 2024.

Currently, IR35 legislation enables HM Revenue & Customs to collect more tax than it should as tax that has already been paid isn’t offset. Due to this issue, businesses have been hit with a tax liability that’s up to 4 times higher than the alleged underpayment of tax.

The incoming changes will introduce an offset mechanism that is likely to completely eradicate the huge problem of double taxation. The updated IR35 legislation would mean that any tax liability would be shared between both the client and the worker by estimating the offset of tax already paid by the worker. This offset can also be applied retrospectively for any unsettled bills dating back to April 2017. Unsettled bills could reduce by up to 75%.

IR35 Refresher: What You Need to Know

Despite being introduced nearly a quarter of a century ago, IR35 has undergone many revisions and changes over the past 23 years since it became law. The legislation can be confusing at the best of times so read on for a refresher on what it is and how it impacts you as a self-employed person.

What is IR35?

If you’re a sole trader, you’re unaffected by IR35. But if you operate through your own limited company to provide your services to clients, it’s important that you understand IR35 and stay compliant.

IR35 is tax legislation that is also known as the ‘off-payroll working rules’ or ‘intermediary legislation’. It was introduced by the Government with the aim of stopping tax avoidance by ‘disguised employees’ in both the public sector and private sector.

It aims to stop employers from engaging employees on a contract basis to avoid paying Employers National Insurance Contributions and to avoid the cost associated with providing employment benefits such as holiday and sick pay and employer pension contributions.

This way of working can also enable workers that are technically employees to control their own tax affairs rather than their taxes being deducted at source through Pay As You Earn (PAYE). This means they can take advantage of tax-efficiencies to lower their liability which results in lost revenue for HMRC estimated at £1.2 billion each year.

It’s important to note that the onus is on ‘employers’ to determine the IR35 status of contractors they engage with rather than the contractors themselves. They must confirm their determination in a ‘Status Determination Statement’ which must include the reasons for the decision.

This only applies to medium and large businesses that don’t meet 2 or more of the following criteria as defined by the Companies Act 2006:

  • Turnover less than £10.2 million
  • Balance Sheet total less than £5.1 million
  • Less than 50 employees

Working arrangements and contracts are assessed to determine IR35 status which can either be Inside IR35 or Outside IR35.

What Does Inside IR35 Mean?

If through a contract you have the same responsibilities as a permanent employee, are managed like a permanent employee, and receive the same benefits as a permanent employee then it’s likely that you’re inside IR35 and viewed by HMRC to be an employee.

Because HMRC doesn’t consider you to be self-employed, you must pay the same National Insurance Contributions and income tax as a permanent employee which are deducted at source through PAYE.

It’s important to note that it’s the contracts that you undertake that are Inside IR35 rather than your business itself.

What Does Outside IR35 Mean?

If you’re a self-employed contractor, freelancer or consultant working through your own limited company, and being paid by it, the ideal scenario is that your engagements are outside IR35.

You’ll receive a gross sum from your client for your services and you have control over how your remuneration is structured which presents an opportunity to leverage tax-efficiencies which makes being Outside IR35 the ideal scenario. But you also have the responsibility of paying the correct tax and National Insurance contributions rather than your client as your NIC and tax is not paid through PAYE.

How is your IR35 Status Determined?

There are three main tests to determine IR35 status.

Control

If your client has direct control over the service you’re providing them and how you provide it, your contract will usually be Inside IR35. This could include the client controlling things such as the hours or days you work, the location that you work from and direct input regarding how the service is delivered. If the contractor has this control the contract falls Outside IR35.

The Right of Substitution/Personal Service

If you can’t provide a substitute to work on a contract if, for example, you’re unable to work through illness, then HMRC would consider this to be an indicator of a contract of employment and you’re likely to be Inside IR35. If you’re Outside IR35, the service could be delivered by a suitable substitute, be it another employee or your business, or a subcontractor, than a personal service by yourself.

Mutuality of Obligation

A self-employed contractor will work on a specific project or contract with start and end dates agreed with the client. There should be no expectation of any further work on an ongoing basis by either party once the contract is completed. If there is, mutuality of obligation exists and this is an indicator the contract may be inside IR35. If there’s no expectation of any further work after the contract completes, it’s likely to be outside IR35.

Other factors can be considered such as whether you receive employee benefits, whether you shoulder financial risk such as paying to rectify any errors you have made, and whether you have your own business insurance.

There are understandably grey areas and in an attempt to bring clarity HMRC introduced the Check Employment Status for Tax (CEST) tool which can be used to get HMRC’s assessment on IR35 status.

IR35 and Gorilla Accounting

Despite ultimate responsibility for determining IR35 status falling on the client, in most scenarios, it’s important for contractors to understand IR35 legislation and to assess the IR35 status of the contracts they undertake to ensure they’re being classified correctly. There is a possibility of an HMRC investigation and fines and penalties due to not following the IR35 rules and incorrectly determining your employment status classification.

We understand it’s not always easy to determine whether a contract lies inside or outside IR35 and ensure compliance. This is why Gorilla Accounting has partnered with Qdos who specialise in IR35 contract reviews. If you have any queries about IR35 or our accounting service, our expert accountants are on hand so call 0330 024 0406 or request a call back today.

 

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