- IR35 was introduced in 2000 as a piece of legislation to tackle perceived tax avoidance of consultants operating via Ltd Companies – who in many cases were actually ‘disguised employees’.
- It only applies to you as a contractor if you operate via a Limited Company; also referred to as a PSC – ‘Personal Service Company’. Note: it does not apply if you are engaged as a ‘fixed-term contractor’ paying PAYE tax; or operate via a genuine Umbrella firm who deduct PAYE/NI contributions for you.
- IR35 is a complicated piece of legislation which is generally considered to have been unsuccessful in its original aim, for the following reasons:
- It has been open to interpretation, with too many grey areas. The 2000 rules require an assessment of whether a contractor is (a) operating a genuine business operation, or (b) acting as an employee of the end client. There are tests used to determine this status, which were subsequently developed through case-law; the results of which were often confusing / unclear.
- The responsibility to determine the above status determination (whether the consultant was working inside or outside IR35), has historically been on the provider (the consultant operating via a Ltd Co). If the contract was deemed inside IR35 - ‘acting as an employee of the end client’ – the PSC/consultant was required to pay the appropriate taxes and NI contributions due.
Under current rules:
Contractors are responsible for determining their employment status under the IR35 rules and paying the relevant tax and NI contributions.
Under new rules:
End clients are responsible for determining the employment ‘status’ of the consultants they engage under the IR35 rules. This requires each client to perform a status determination for each assignment.
The changes (6 April 2020).
- The responsibility for determining the IR35 status of a contract will shift from the PSC provider to the end client (if a middle to large private sector end user). They will do so by performing a status determination for each assignment. The fee-payer is responsible for deducting the relevant tax and NI contributions at source. Depending on the contractual chain, this would usually fall to either the client or the recruitment agency.
- The new rules will apply to all payments made to a PSC on or after the 6th April 2020 – regardless of when the contract started.
- These rules have already been in place for public sector firms since 2017.
- End clients classed as ‘Small’ for the tax year (based on Companies Act 2006 definitions) will be exempt from applying the new rules.
How to make the status determination – inside IR35 or outside IR35?
- HMRC has developed an online employment status tool (CEST) to give some clarity. In addition, the key factors used by HMRC in determining IR35 status are as follows:
- Substitution: if the PSC / Limited Company has the option to send an alternative consultant (a substitution) to complete a piece of work in your place, it suggests that you are not providing a personal service and the worker is not an employee.
- Control: if the end Client controls the workload of the contractor and the way in which it is to be carried out, the assignment is likely to be inside IR35 – the work has the characteristics of an employee relationship; not the provision of a specialist service.
- Mutuality of obligation: if both parties pass the above tests, it is unlikely that mutuality of obligation applies as it will be deemed outside IR35 anyway. MOO can be present in both contracts of service and contract for service.
- Financial risk – contractors may take on financial risk in the provision of their services; such as the need to rectify poor quality service at their own cost. If a contractor does not take on any real financial risk, they will most likely be deemed an employee for tax purposes.
Hiring a contractor for a role deemed “inside IR35”.
- For roles deemed ‘inside IR35’, end Clients will likely take the following approach:
- Require contractors to operate via an Umbrella Company; which would employ the contractor directly – deducting PAYE and NI contributions at source.
- Hire a contractor directly on a ‘fixed-term contract’. In this scenario the contractor would be employed in the same way as a permanent employee, but for a set time – e.g. 6 or 12 months.
- Deem the consultant an inside IR35 PSC and calculate the ‘deemed employment payment’ using the RTI (Real Time Information) payroll system. The deemed employment rate is the income of the worker after deductions (including Employers NI paid by the fee-payer). Neither worker rights nor stakeholder pensions rights would apply.
Do the new IR35 rules still apply if the contractor has more than 1 client?
- The new rules will apply regardless of how many clients and assignments the contractor has.
- IR35 status is assessed on an assignment by assignment basis; with each assignment judged on its own merit.
- For example: it is possible to be outside IR35 for one contract assignment and inside for another concurrently. You can maintain your PSC for an assignment deemed to be outside IR35; but be paid via an Umbrella (or directly employed in a fixed-term contract) for another.