IR35 Background
In March 1999 the Inland Revenue (now HMRC) issued a seemingly innocuous press release outlining their plans to tackle ‘disguised employment’. This turned out to be one of the most significant pieces of UK tax legislation in history.
IR35 became law in 2000 and there was a partial overhaul of the IR35 system in 2011. A PR drive by the Government followed in 2015 as the reception to IR35 legislation was generally negative. It caused significant uncertainty in the contracting sector and beyond.
The 2017 IR35 reforms were designed to address issues with previous reforms. They stipulated that public bodies rather than contractors were responsible for determining the IR35 status of contractors.
The ‘off payroll’ reforms were due to go live in the private sector in April 2020, but this was delayed by a year due to the COVID 19 pandemic. They finally went live in April 2021. These reforms put the onus medium and large-sized businesses to determine the IR35 status of any contractors they engaged, rather than the responsibility for status determination lying with the contractor.
In the September 2022 Mini-Budget, then Chancellor of The Exchequer Kwasi Kwarteng announced that the IR35 reforms of 2017 and 2021 would be abolished from April 2023.
This was positive news for contractors as reverting the legislation back to the 2016 position would mean they had the responsibility of determining their own IR35 status rather than the employer.
The picture changed quickly however, and in the October 2022 Budget Chancellor of The Exchequer Jeremy Hunt announced that the IR35 reform repeals announced in September would no longer happen.
IR35 Explained
If you work as a contractor you will have no doubt heard of IR35. But what is IR35 and how does it affect you?
IR35 legislation applies to contractors that operate through a limited company to provide services to clients.
IR35 is also referred to as ‘intermediary legislation’ and aims to tackle ‘disguised employment’ to reduce tax avoidance. The purpose of it is to prevent employers from engaging employees on a contract basis to avoid paying Employer’s National Insurance Contributions and to avoid providing employment benefits such as pensions, sick pay and holidays.
HMRC will assess contracts and working circumstances to ascertain whether contracts lie inside or outside IR35. If a contractor has the working relationship with the employer as an employee, they are deemed to be inside IR35. A legitimate contractor working through, and being paid by, their own limited company will fall outside IR35, providing their working relationship and engagements are deemed to be so.
According to HMRC, many workers are not being classified properly which is leading to significant economic losses of around £1.2 billion a year. So far, HMRC estimates that the IR35 reform in the public sector has generated at least £410 million in additional revenue for the Treasury since April 2017.
IR35, otherwise known as ‘off-payroll tax’, applies to the private and public sector and states that employers will now assess contractors to establish whether they’re inside or outside IR35.
If a contractor is found to be inside IR35, the employer or agency has to deduct the relevant National Insurance contributions and tax through PAYE. This only applies to medium or large businesses, so smaller companies can breathe a sigh of relief.
Are You a Small, Medium or Large Business?
According to the Companies House Act 2006, c.46, part 15, a ‘small business’ is defined as:
"382. (3) The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements– 1) Turnover (not more than £10.2m) 2) Balance Sheet Total (not more than £5.1m) 3) Number of Employees (not more than 50)”
For medium and large businesses the onus for determining IR35 status will fall with the end client or agency, meaning contractors will not be the only one responsible for figuring out the right tax and national insurance contributions they must pay.
This is set to impact most contractors in the private sector and is estimated to add £1.3 billion per year to the Treasury from 2023 onwards. As contractor accountants, we can help you figure out whether you’re affected by IR35 and what you can do to ensure compliance.
HMRC’s Check Employment Status for Tax (CEST) Tool
CEST (previously known as the Employment Status Service) is HMRC’s digital IR35 assessment tool. It’s designed to determine whether IR35 legislation applies to a contract, whether the worker should pay tax through PAYE and whether off-payroll working rules should apply to a public sector engagement.
If you fall foul of IR35 legislation, the financial ramifications can be significant, so it’s important to understand how it works.
The CEST tool gives HMRC’s view on:
- The employment status of a worker or of an individual that you represent or engage
- Whether the IR35 (off-payroll) rules should apply to a contract
- Whether HMRC would consider you as self-employed or employed for National Insurance contribution and tax purposes if you expect to have, or already have, a work contract
The unprecedented IR35 reform in the public sector has been the subject of disagreement as the CEST tool has delivered confusing results. Around 15% of CEST users have received inconclusive results on their employment tax status.
HMRC states that in order to use the CEST tool, the following information is required:
- The worker’s responsibilities
- Who decides what work needs doing
- Who decides when, where and how the work’s done
- How the worker will be paid
- If the engagement includes any benefits or reimbursement for expenses
The answers should reflect the usual working practices of the engagement.
If you work as a contractor, there are several ways you can ensure you’re compliant with the IR35 regulations, including:
- Taking the HMRC IR35 test, which will allow you to assess your current business practices.
- Auditing your work practices after the test results, allowing you to assess how IR35 will impact you and how you can solve potential problems.
- Taking ‘substitution’ into account, as the right to provide a substitute to work on a contract is often a key component in IR35 assessment and investigations.
- Considering raising your rates, as working inside IR35 means paying more tax than you initially expected.
Determining IR35 Status
Two possible classifications can be determined when undertaking an IR35 assessment:
Inside IR35
It’s not your business that can be inside IR35, but the contracts you undertake.
If you get the same benefits and have the same responsibilities as a permanent employee, and are managed like a permanent employee, then it’s likely that you’re inside IR35.
If you are operating inside IR35, you must pay the same National Insurance Contributions and income tax that would be paid by a permanent employee. This would be taken care of by your employer through PAYE.
There are several ways to ascertain whether you’re an employee rather than a contractor. Your IR35 status can be determined through tests based on historical case law which are applied to your written contract and working practices.
It’s important to be aware of IR35 legislation and any potential changes to it as you may have to prepare a defence if HMRC wishes to investigate you. If you want to know more about this, we’ve written a guide on HMRC IR35 investigations and what you need to know.
Outside IR35
If you’re a genuine contractor, freelancer or consultant working through – and being paid by – your own limited company, then it is likely that your engagements will fall outside IR35.
Your client will pay your business a gross amount and you can choose how you structure your income. You have the responsibility for paying the correct National Insurance Contributions and tax rather than your client as your NIC and tax is not paid through PAYE by your end client.
Being outside IR35 is the ideal scenario for a contractor operating through their own limited company. As a result of their outside IR35 status, operating through a limited company is likely to be the most tax-efficient structure for the business which can mean more take home pay with the right remuneration structure.
There are several factors you can keep in mind to check whether you’re inside or outside IR35, including:
- Control – Are you under the direct control and supervision of your client? You’d be classed as inside IR35 if your client has control over the service you’re providing them and how you provide it. This could include the client controlling your working hours, the location you work from and input into how the service is delivered. If the contractor has this control the contract falls outside IR35.
- The Right of Substitution – Are you allowed to provide a substitute to work on the contract if you’re unable to work? If not, then HMRC would consider this to be an indicator of a contract of employment and you’d be inside IR35. If you’re outside IR35, the service could be delivered by an employee of your business other than yourself.
- Mutuality of Obligation – Are there any expectations of future work after the current contract expires? A self-employed contractor will work on a specific project with start and end dates that they’ve been contracted to do. There should be no further expectation of work by either party once the contract is completed. Mutuality of obligation would only exist in contracts that fall inside IR35.
Comprehensive IR35 Review
It’s not always easy to determine whether a contract lies inside or outside IR35. There are many factors to take into account so contractors will often enlist the help of a specialist to determine their IR35 status to ensure they are compliant with IR35 rules.
This is why Gorilla Accounting has partnered with Qdos who specialise in contract reviews for contractors, freelancers and consultants.
Any contractors, freelancers or locums who are concerned about IR35 should contact us to seek specialist advice from our expert IR35 accountants.
Gorilla Accounting is an accountancy firm exclusively for contractors, freelancers and locums and our team of accountants are happy to provide expert impartial IR35 advice for contractors operating through a limited company.
Get in Touch with Us for IR35 Advice
If you’re looking for an expert IR35 accountant, look no further. Gorilla Accounting can help you navigate the complicated IR35 rules to ensure you remain compliant with IR35 legislation and avoid any HMRC penalties.
This is why we’ve partnered with Qdos to provide a specialist contract review service to help contractors, freelancers and consultants determine their IR35 status.
You can also send Gorilla Accounting an enquiry, speak to our accountants on 0330 024 0406 or request a callback.