Having worked with the UK's largest Contractor specialist, our Director Kirstie is no stranger to the IR35 legislation and the impact it has on how contractor's run their businesses. Here's our guide to better understanding IR35.
What is IR35?
IR35 (off-payroll workers) is a government legislation which considers whether a worker is a 'disguised employee' or a business in its own right. As limited company owners can take advantage of tax efficiencies compared to on-payroll workers, IR35 was established as a way to reduce tax evasion. It stops disguised employees who operate the same as permanent employees but work through their own company and ultimately pay less tax.
How is my status determined?
The three main factors which determine your status are:
Your contract of services will be between your end-client and your limited company - business to business. As your client is engaging with your limited company and not you personally, you have the freedom to choose who performs the duties. For one particular person to carry out a role is an essential element of a contract of employment, which would therefore be deemed inside IR35.
Mutuality of Obligation
It is fair to expect an employer to provide continuous work for an employee and that employee to be obliged to complete it. You would not expect a clause stating Mutuality of Obligation to be in your contract of services, once you have completed your given assignment, project or time set out in your contract, neither party is obliged to offer or complete any further work.
Supervision, Direction & Control
Typically an employer will tell their employee what has to be done, when and where it has to done and how it has to be done. A contractor would expect to have full autonomy over when, where and how they achieve their contract goal. You would expect a clause stating your right to exercise significant control over how you perform your duties.
What other factors contribute to HMRC’s decision?
Ultimately your status depends on your working practices, it is one thing to have the clauses above in your contract but it is another to ensure you practice these day to day.
HMRC can review everything to establish if you are an employee or an independent contractor including but not limited to:
Financial Risk – employees rarely be take a financial risk to be at work. Contractors, being a separate business may have to purchase their own equipment, software or tools which could leave you out of pocket.
Employee Benefits – contractors are not entitled to employee benefits such as holiday and sick pay, annual staff parties, training courses and pension contributions.
Freedom – contractors can work flexible hours and from where they choose, where employees would be expected to gain approval from managers to work from home.
Termination – contractors normally have the option to terminate the contract immediately if they so wish, and likewise their client can too. This doesn't provide the safety of a notice period an employee usually has.
What are the implications of being inside IR35?
If you are caught by the legislation then IR35 (inside IR35) you cannot use traditional tax-planning techniques to draw your income from the limited company (typically low salary and high dividends). If you are deemed a disguised employee, it will require you to pay almost all of your contract income as a salary meaning you are taxed in the same way as a permanent employee. As such, you will be liable for full tax and National Insurance on these earnings.
I'm still unsure, can you review my contract?
IR35 rules are complicated and aren’t always easy to follow, that’s why it’s important to get the best advice possible. We would be happy to review your contract of services and working practices to determine your IR35 status.
We offer contractors all-inclusive service packages at competitive fixed fees, find out more here.
Equal Accountancy Ltd offers Accountancy and Bookkeeping services in Hemel Hempstead and surrounding areas across Herts, Beds and Bucks. We offer a range of services for Limited Companies, Self-Employed individuals and Landlords including Year End Accounts, Corporation Tax returns, Self-Assessment Tax returns, Payroll services, VAT returns, Bookkeeping and Company Secretarial. Get in touch today for a free, non-obligatory quote for your business needs.