IR35: A Guide for Consultants
IR35, also known as off-payroll working rules, is a piece of UK tax legislation designed to close a loophole in the tax system where workers could use the setup of a limited company structure to pay less tax. Despite a contract being with a limited company, if the reality is more like an employer-employee relationship, the worker should be taxed as an employee. This is referred to as a ‘deemed employee’.
So why does it matter to me as a contractor?
If HMRC finds that you have been working on a self-employed basis (described as ‘outside IR35’) when, in fact, the service you provide your client reflects that of employment (described as ‘inside IR35’), you’ll be required to pay the missing tax back to HMRC, plus interest and any penalties.
Given that HMRC can investigate as far back as six years, being found non-compliant can have huge financial consequences. However, the very good news is if you are deemed as an employee and become fully compliant, HMRC has said that this will not trigger an investigation for past years.
How am I affected if I am working under IR35?
As of 6th April 2021, these rules will be rolled out in the private sector, with medium and large businesses placed in charge of setting the IR35 status of contractors.
When working with a company that HMRC considers ‘small’ in the private sector from April 2021, contractors will remain responsible for setting their IR35 status and all of their taxes. HMRC defines a small company as one which does not exceed two or more of the following criteria: an annual turnover above £10.2 million, a balance sheet total of over £5.1 million, or more than 50 employees.
How can I check if I fall under IR35?
IR35 reform is considered controversial because contractors and businesses are largely inexperienced with regards to making status decisions, often due to complex working nature and tests. However, the three main principles to decide IR35 status are:
- Supervision, Direction and Control: What degree of supervision, direction, and control does your end-client have over what, how, when and where you complete your contract and day to day work?
- Substitution: Are you required to carry out the work yourself, or can you send someone in your place?
- Mutuality of obligation: Is your client obliged to offer you work, and are you obliged to accept it?
Other factors that affect your IR35 status are how you are paid, alternative work, equipment, and premises from where the work is conducted.
So, how do I determine the status of my contract?
You can use the CEST tool (www.gov.uk/guidance/check-employment-status-for-tax ) designed by HMRC to help employers and contractors determine IR35 status. HMRC has said they will stand by the result of the CEST tool as long as the working relationship is the same as the answers entered into it.
If you get an unexpected result after using the CEST tool or need help planning for your financial future, drop us a line at Ten Forward Finance to see how we can help.