What is IR35?
IR35 is the legislation that HM Revenue & Customs developed in 2000 to make sure contractors and businesses were paying the right amount of tax and national insurance.
It refers to what is called the “anti-avoidance” tax legislation designed to tax 'disguised' employment at a rate similar to those who are directly PAYE employed. In this context, "disguised employees" means workers who receive payments from a client via an intermediary, for example, their own limited company, and whose relationship with their client is one of a clear employer / employee defined as if they been paid directly they would be employees of the client.
Until April 2017, the onus was on the contractor and more readily, a contractor's company (Ltd etc / (PSC)) to deal with the process of determining their IR35 status. Any associated Tax and NI liability was directly attributed to, and the responsibility of the PSC.
However, on 6th April 2017 a reform of the IR35 was introduced by HMRC in the public sector. The responsibility shifted, so that the Public Sector body (Client) became responsible to determine the contractor's employment status for tax purposes.
How can I be sure of IR35 status as a Client?
HMRC has created a tool to help employers understand whether someone working for them falls inside IR35 or not. The Check Employment Status for Tax (CEST) tool was introduced alongside the 2017 reforms and became the go to tool for IR35 determination.
In the private sector, it’s down to the contractor to show that there is no employment relationship. If they fall inside IR35, then the contractor needs to pay the tax and National Insurance Contributions that are due.
In the public sector, it’s up to the employer to prove that a contractor falls Inside IR35. If they fall inside, the employer, agency or third party that pays the contractor will need to deduct the tax and National Insurance Contributions and report them to HMRC. Inside IR35 Contractors tend to use Umbrella Companies or composites to ensure tax compliance.
Outside of IR35?
When working out whether a contractor falls outside of IR35, there Many factors that are used in the determination such as
What equipment is being used? If a contractor is using their own equipment you may expect them to fall outside of IR35.
Risk. Has the contractor used their own money to provide something that’s needed for the job? If they are paying for and taking on the costs for equipment and materials purchased as well as the upkeep, it weighs heavily in favour of self-employment. Because of this, contractors outside of IR35 are often required to have professional indemnity insurance.
Exclusivity. Typically, self-employed individuals can work for multiple clients at once.
Outcome Based Deliverables: It is commonplace for Outside IR35 workers to be paid one-off sums for the service they provide – not standard timesheet driven payment.
Service Definition: Similar to outcome-based deliverables, the Outside IR35 arrangement means that the company is providing a particular service to the Client and is responsible to ensure timescales and delivery of that service match the defined project roadmap.
IR35 is a veritable minefield,
however your Change IT Consulting team have a significant grasp of all the policies and processes so if you are ever in doubt, then just ask.