IR35 for contractors summary by Accountant Near Me - GN Accounting Ltd
What is IR35, and should I be concerned?
IR35 is legislation designed to target workers claiming to be contractors in order to reduce their tax and national insurance contributions. You need to be aware of the rules and make sure you are compliant.
Ensuring you are compliant can at times be difficult. There are a variety of aspects that need to be considered as opposed to hard rules. You need to assess whether you are inside or outside IR35 every time you take on a new contract.
HMRC can investigate your arrangements at any time. If they discover you have not acted according to the IR35 rules you may have to pay tax and national insurance contributions for past periods. We are often asked advice as to the rules on claiming expenses incurred for travel and meals. This article should provide a general guide as to the rules applied by HMRC.
Does it apply to me?
The rules apply if, had you sold your services directly rather than through a company, you would have been classed and an employee (by HMRC) rather than self-employed.
What does inside and outside mean?
Quite simply if you are inside IR35 it means you are caught by the rules. You will have to pay tax ad NIC on your earnings the same as if you were directly employed by the contractor.
If you are outside of IR35 it means the rules do not apply in your circumstances.
Whose responsibility is it?
Who determines whether you are inside or outside IR35 has recently changed. To complicate things further it is also going to change again in the near future.
Since April 2017 If you work in the public sector the responsibility lies with the end client. If you are inside IR35, tax and NIC will be paid to HMRC. You will then receive the net amount paid to you or your limited company.
For the private sector it is slightly different. Until April 2020 it will be your responsibility to assess whether you are inside or outside of IR35. If you determine you are inside, then it will be your responsibility to pay tax and NIC.
After April 2020 the rules will change. They are likely to be similar to that of the public sector. Consultations are still being held and are far from final. A further article will be written once the rules have been decided.
How to determine whether you are inside or outside IR35
This is a tricky one. The line between being employed and self-employed is very fine and often not clear. The main factors to consider are:
Control – Who has the significant control? This can be control of hours worked, working location, tasks undertaken and even if you are overseen by another person. Employees tend to lack control, whereas contractors would have more control.
Mutuality of obligation – An employer will try to make sure their employees have a continuous supply of work. A contractor will often be contracted for a specific task with no further expectation of further work. Clear end dates and the right to walk away early from a contract are key elements
Equipment – Who provides the working equipment. A contractor will often have their own equipment to perform the work. An employee will have the equipment provided by their employer.
Right of substitution – Employees cannot get somebody else to do their job. A contractor on the other hand is hired to perform a task, no matter who completes it. This right may never be exercised but adding the clause to the contract is one of the strongest tests.
Financial risk – It is unusual for an employee to be at financial risk. A contractor on the other hand is likely to have many financial risks or burdens. Eg, running a business, purchasing equipment, hiring helpers, management decisions.
Basis of payment – How an individual is paid may be a factor to ascertain whether they are employed or self-employed. Hourly, weekly and monthly rates tend to be associated with employment. Invoicing for work done and bearing own expenses is associated with self-employment. This test is known to often be inconclusive on its own due to billing practices within certain industries.
Benefits – Employees are entitled to holiday pay, sick pay, pension contributions, bonuses, expenses etc.
Intention – Have the client and individual agreed that there is no intention of an employment relationship?
Personal factors – Is the individual allowed to work for other clients? Often employees have specific clauses that they cannot work for competitors or hold more than one employment. Self-employed individuals can often have more than one client.
IR35 is by no means a simple subject. This article only provides a brief introduction to the topic and contractors should inform themselves on the subject or seek professional advice.
With changes coming into effect from April 2020 to the private sector, it is only going to get more confusing. It is a subject that is currently under scrutiny by HMRC. If you haven’t thought about it in the past, perhaps now is the time?
More information can be found directly from HMRC on the following link: https://www.gov.uk/guidance/ir35-find-out-if-it-applies
If you have any questions on the above or require any guidance please contact us at your convenience.
The information contained within this document is correct at the time of issue. Advice should be sought from an accounting or tax professional before following any guidance.