What is IR35 and why do I care?
IR35 was introduced in the year 2000 and was effectively introduced to tackle tax avoidance by workers supplying their services to clients via a Limited Company (or other ‘intermediary’) who would otherwise be an employee.
How does IR35 affect workers?
If IR35 applies to your contract (meaning you operate within IR35), then you need to pay the same Income Tax and National Insurance Contributions (NICs) as you would if you were to be employed directly by the organisation you are contracting to. It effectively means that you don’t get the benefits of being an employee (holiday pay, sick pay, etc.) and you don’t get the tax benefits of operating outside of IR35. So not a very good deal for you.
How does HMRC check my IR35 status?
Who decides on whether you operate within IR35 or not depends on where you work.
Public Sector — your employer checks your IR35 status
Private Sector — currently (up until April 2021) the Limited Company (i.e. you) performing the services decides on whether they sit in or out of IR35.
The proposed changes in the Private Sector from April 2021 are that:
Medium and large businesses will be responsible for assessing an individuals employment status.
The existing rules will continue to apply to the smallest 1.5 million businesses.
Where it’s determined the rules do apply, the business, agency, or the third party paying the workers’ company will need to deduct income tax and employee NICs and pay employer NICs.
What do I need to do?
If you provide your services to a third party client through a Limited Company, then you should review IR35 for every contract you undertake, including renewals.
It is possible to undertake multiple contracts in a year and be inside IR35 on one contract and outside on another, even when you are contracting to the same client.
The main factors considered when deciding IR35 status are:
- Financial risk
- Basis of payment
- Existence of employee rights
- Exclusive services
- Mutual intentions
- Mutuality of obligations
- Provision of equipment
- Personal factors
There can be significant consequences of ignoring IR35 legislation. Interest and penalties may be charged on any additional tax and NIC due as a result of an HMRC enquiry.
IR35 looks at the underlying relationship between the worker and the client for each contract. The facts of each engagement determine whether IR35 applies and not any label, description or job title.
IR35 will apply if all the following statements are true:
The worker personally performs services for another person or business (the client) or is under an obligation to do so;
The services are provided to the client through an intermediary such as a limited company or partnership which does not meet the definition of a Managed Service Company (MSC). A MSC is a company that is controlled and run by a third-party service provider;
The services are supplied as either an office holder of the client or if the services had been provided directly to the client under a contract between the worker and the client, the workers’ employment status would be regarded as being that of an employee or office-holder of the client;
The specific IR35 conditions of liability for the intermediary are met. The conditions of liability are met if, broadly, the worker controls at least 5% of the intermediary company.