What is IR35?

The government introduced IR35 to clamp down on tax avoidance through the use of a limited company. IR35 legislation (off-payroll working) was introduced to the Public Sector in April 2017 and it came into force for the Private Sector in April 2021. It looks at whether a contractor is working any differently from an employee of the client. The government was concerned that contractors were starting limited companies just to take advantage of tax efficiencies, even though they were doing the same job as permanent employees. This is referred to as false self-employment. As a contractor you are likely to take on a mixture of assignments, some will be deemed inside IR35 and some outside IR35. You must pay the correct amount of Income Tax and National Insurance for every assignment you work on. IR35 is now applied on an assignment by assignment basis and is determined by:

• The client (hirer) if a medium or large sized business. The client ultimately has responsibility for the determination and takes liability for the decision.
• You, as a Director of a limited company if the client hirer is a small business. IR35 still applies but the responsibility for the status stays with you.

If your assignment is deemed inside IR35 you should pay employed levels of tax. If deemed outside IR35, and you’re the director of a limited company, you can choose to pay yourself using a combination of salary and dividends.

HMRC have an online tool to provide guidance on determining your IR35 status called the CEST tool (Check Employment Status for Tax) which can be completed anonymously. HMRC have confirmed they will stick by the outcome of the ‘CEST’ tool when completed correctly. 

IR35 does not apply to you if you are an employee (for example of an umbrella company) paying employed levels of PAYE and National Insurance Contributions.

What are the key factors used by HMRC in determining employment status to watch out for?

The first three (control, substitution and mutuality of obligation) are acknowledged by industry experts to be the most important factors. So watch out for the following;

1. Control

As a contractor you will be expected to conduct your assignment and day to day work (how, what, when and where) completely under your own control. If the client imposes any sort of control over you, it’s an indication that you may fall inside IR35.

Personal Service (Substitution)

Another test of ‘employment’ is whether your limited company (PSC) can provide a substitute to do the work. This simply means that you should be able to send a substitute to complete the work on your behalf, without restriction. If you genuinely can provide a ‘substitute’ and sometimes actually do that, then the assignment is likely to be outside IR35. Remember this must be agreed with the client before the assignment begins so you can always prove to HMRC that the client was happy to accept a substitute. If you have to personally provide the services agreed with your client, this is usually a strong sign that you’re an employee and therefore inside IR35.

3. Mutuality of Obligation (MOO)

To be deemed outside of IR35, there must not be a ‘mutuality of obligation’. There are two obligations to consider: An obligation for one party to offer work and if work is offered, an obligation for the other party to accept it. Put simply, a contractor must work from project-to-project, with no obligation to carry on working for the client after the work is complete. A contractor also has the right to end an assignment part way through. An employee, on the other hand, can only work for one company and has an obligation to carry on working when their assignment is complete. If your assignment allows you to take on assignments from other clients simultaneously this is an indicator of being outside IR35.

Other IR35 factors you need to watch out for are;

4. Financial Risk

If you can demonstrate to HMRC that there is some financial risk to you, you will be likely to win an IR35 case if it happens. You could do this by offering compensation if you miss a deadline or fixing errors at your own cost.

5. Part and Parcel

Put simply this is the level of your integration into the client business. Remember that as a limited company you are a seperate entitiy and must be distinguishable from permanent employees. You shouldn’t receive any benefits that permanent employees receive such as pension schemes, staff car parking, subsidised canteens, gym membership and such like.

TIPS!

•  If the client states that you must work a certain number of hours per week at a certain rate on an ongoing basis and requires you to take whatever work the client throws at you, then the assignment is likely to be inside IR35.
• Try to operate under different hours to your client’s employees.
• Don’t go to meetings where the purpose is to tell you how the company or department are doing.
• Don’t ask if you can take a holiday. Tell your client when you are going.
• The longer your engagement by the client the more likely it falls inside IR35.
• Provide your own equipment if possible.
• Try to work remotely sometimes if possible.

What if IR35 applies to my assignment?

Whilst there are better tax benefits to working outside IR35, if your assignment is deemed to be inside IR35, don’t panic.

You can still keep your limited company or PSC and continue with your assignment. You simply need to ensure you pay the right amount of Tax and National Insurance in the right way.

Alternatively you may find that the agency run a 'deemed' payroll and make the deduction prior to paying.

Your accountant can assist you with this but it might be beneficial to switch to working under an umbrella company for the duration of the contract which is inside IR35. Your accountant can advise you about your options for your limited company such as dormancy or closure using an insolvency service such as a Members Voluntary Liquidation (MVL).

TIPS!

There are points you could consider which may take your assignment outside IR35 such as;

• Ask the client why they believe the role to be inside IR35? Once you have the reasons for this then, taking into consideration the points outlined in this guide, identify whether certain elements of your contract could change to make it fall outside IR35.
• Consider whether your contract be changed to a statement of work so that work is completed on a ‘deliverables’ basis.

Need more help?

We hope that this guide has helped you understand the basics of IR35 and how to stay within HMRC guidelines. We’re here to help you navigate the often complicated legislation so you can enjoy the flexibility and benefits that contracting offers.

As an Accredited Member of the FCSA and APSCO Trusted Partner, we have a wealth of experience helping contractors through legislative changes such as IR35. Compliance is at the centre of everything we do, keeping you and our agency partners safe using Umbrella.co.uk services.

We have a specialist limited contractor accounting division, CloudAccountant.co.uk, who can advise you further about IR35. Please visit our Accountancy Services page to find out more.