IR35 is legislation brought in by the government in April 2000 to counter what HMRC class as a disguised employment. As you are aware the new IR35 changes will be implemented in April 2020 and will bring private sector IR35 in line with the public sector reform which was implemented in April 2017.
This shifts responsibility for assessing IR35 status from the contractor to the end-user, so that it is the end user who decides if IR35 applies, the engager e.g. end-user or recruitment agency will be responsible for accounting for and paying the related tax and NIC, EE’s and ER’s so they will be responsible if challenged by HMRC .
The new reform will apply to:
- The end user i.e. any business classed as a large or medium company.
- The fee-payer, if different, such as fee-payers in the recruitment sector, and
- Contractors providing services to medium and large businesses.
Where the end-user is a small company, the contractor will continue to be responsible for assessing whether IR35 applies. A small company is defined as having 2 of the following; a turnover under £10.2m, £5.1m on the balance sheet and 50 employees or less.
Off-payroll working in the public sector
From April 2017, if workers are engaged through their own limited company to work for a public sector body, responsibility to apply the intermediaries rules (commonly known as the IR35 rules) fell to the public sector body, agency or other third party paying the worker’s company. The public sector body, agency or other third party will be liable to pay any associated income tax and National Insurance.
Where individuals are working through their own limited company in the private sector, the same rules will apply from April 2020 to them in some cases, this will depend on the size of the company and the companies decision of their position on the IR35 question of their contractors role.
To help the public sector body, agency or other third party to determine whether the intermediary rules apply, HMRC provided a new interactive online tool. The aim was to support the decision making process, not only for public sector employers, but also for individuals working through their own limited company in the private sector.
If a permanent employee left their company on a Friday, then returned to work on a Monday with the same company in the same role but as a self-employed contractor, this would be considered disguised remuneration and fall foul of IR35.
IR35 was designed to stop employers from releasing their employees from permanent jobs and rehiring them as contractors without the need to pay National Insurance or PAYE tax. At the same time, the move also removes the work rights (i.e. unfair dismissal, sick pay etc.) of the employee - so IR35 is also designed to prevent exploitation in this respect.
What does IR35 mean for you?
If the contract with your client has the same level of risk, responsibility, liability and control as a permanent employee would, then you could be classed as inside IR35. You would therefore not be entitled to the benefits of a corporate tax structure, as you are not taking the same risks or having the same level of control as a director of his/her own limited company. Consequently, you would have to pay PAYE tax and full National Insurance; the expenses you can claim would be reduced, and ultimately you would earn less money.
Is there any benefit in trading through your own limited company if you are inside IR35?
This is where it is essential to get expert IR35 advice.
If you are inside IR35 you can still claim travelling and accommodation expenses, 5% of your turnover. So, from a financial point of view, it still could be worth it. Also, any other contract work you do could also be put through your existing company.
Accounting IT can review your contract and, drawing on their experience, advise whether, in their opinion, it falls foul of IR35.
How to ensure you fall outside of IR35
IR35 has an extremely complex set of regulations. Whilst this is not a comprehensive list, the below pointers should give you a rough idea if you are outside of IR35. We would always recommend contacting us for more in-depth IR35 advice and a full assessment of your current situation.
- Control - Are you free to work under your own management and not completely managed by your client?
- Financial risk - As an employee your financial risk is limited but, if you are a director of your own limited company, you are always at risk of the client not paying for work carried out. In addition, if you need to provide your own equipment (i.e. laptop, mobile phone etc) for work, this is a cost that can ultimately lead to a financial loss.
- Right of Substitution - Does your contract have a clause allowing somebody other than yourself to perform the task your company has been contracted to do?
- Providing your own equipment - Will you be using your own equipment? If you are not using your own equipment, allowances can be made if it is for good reason (i.e. your clients data security means you can’t use your own computer).
- Contract termination - If you have a fixed notice period, HMRC can argue that this means you are more like an employee.
- Work rights - As a contractor, you should not expect to receive benefits such as holiday pay, sick pay, Christmas bonuses etc. from your client.
When considering IR35, HMRC will not look at one issue; they will consider the whole circumstances collectively to determine if you fall inside or outside of IR35.
To summarise if the contract is shown to fall inside IR35 for your limited company you will be allowed a flat rate 5% of your IR35 turnover as the company expenses for running a business, any personal pension payments, and any expenses that could be claimed if you were directly employed and reimbursed by the end user e.g. travel a subsistence . Also, any capital allowances where the items bought are wholly necessary for the relevant work engagement duties. the rest is taxed as PAYE and NIC. There is usually no corporation tax or dividends as all is taken as a salary.
We can do an analysis for you to let you know the tax consequences inside and outside IR35 for your limited company and to discuss any of the information and how it relates to you.
One answer to the above is working through an Umbrella company, AIT provide this service, please see our Umbrella section on our website and for more information on any of these issues call us directly on 0800 141 3393. Or if you would prefer, you can always ask us a question online.