IR35 is defined by HMRC as off-payroll working. IR35 legislation is designed to ascertain whether or not a contractors and businesses are avoiding paying tax and national insurance contributions at the appropriate rate by working as disguised employees.
The legislation was introduced in April 2000 some 20 years ago. Although recently it has been given more attention by HMRC and the media.
Many contractors provided their services to a business through their own limited companies. In other words the contractor provided services to one business. Essentially the contractor would work similar hours and would be provided equipment and be under the direction and control of the business. The contractor would be in effect an employee of the business.
The obvious advantages are less tax and national insurance contributions paid by the contractor and the business does not have to pay employers national insurance. The business does not have to pay any holiday pay or sick pay to the contractor.
Inside IR35 means that due to a contractors working relationship with the business, the contractor is described as a disguised employee and falls under the IR35 legislation. HMRC deems that a contractor should pay the tax and national insurance under rules for employment.
As such this could also result in employments rights for the contractor such as, holiday pay, sick pay, maternity and paternity pay.
If a contractor is found to be inside the legislation then a deemed payment of tax and NIC will be due at the end of the tax year that an employee would have paid.
To be outside the scope of IR35 means that the legislation does not prevent a contractor paying tax as an employee. In other words it is acceptable for a contractor to operate under their own company and pay tax on dividends.
To be deemed outside the scope of IR35 the contractor would have to demonstrate that they are not under the direction, supervision and control of the paying business. Furthermore, the contractor has also provided their services to other businesses. Another strong indicator of a contractor falling outside the scope is the ability to substitute their work I.e. they can hand the work to another person in their company.
HMRC issued changes to the legislation. Originally to take effect on the 6th April 2020 however, due to the COVID 19 pandemic this has been pushed back to April 2021.
The outline of these changes is that the IR35 private sector and public sector IR35 have the rules aligned.
When the original legislation was written it was up to the contractors to correctly assess their status under IR35, it was the contractors company or agency responsible to correctly account for tax and national insurance deductions.
For the public sector, as of 2017 this responsibility has shifted from the contractor to the public sector body engaging the contractor’s services.
The changes to IR35 due in April 2021 means that the responsibility for assessing IR35 status and paying the correct tax and NIC’s will be passed from the contractors to the private sector businesses engaging them.
The business engaging the contractors services will be responsible and held liable should HMRC decide that a contractor falls within the scope of IR35.
The above legislation excludes smaller businesses meaning that the contractor will be responsible for setting their IR35 status.
The following are questions are designed as a checklist to help you decide whether or not you are in or out of IR35.
The above is a general guide to IR35 familiarise yourself with the basic principle of the legislation. If you are worried about any implications regarding the above legislation, it is important to seek detailed professional advice.
Remember HMRC have the right to investigate your arrangements at any time. This can be mentally burdensome, time consuming and costly. HMRC have the right to act retrospectively, meaning that they can go back six years! investigate your arrangements and apply the legislation to your past income.
If you need any advice or have any questions about IR35 then get in touch
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