What Is IR35?
IR35 is a piece of Legislation often referred to as the off-payroll working rules. The aim of this legislation is to make sure that workers (contractors)who provide their services through an intermediary such as their own limited company, who would be an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.
Who Does IR35 Apply To?
You may be effected by the rules if you are a worker (contractor) who provides their services through their intermediary.
If the rules apply, Tax and National insurance contributions must be deducted from fees and paid to HMRC.
IR35 In The Private Sector?
Changes to the off payroll working rules were due to come in to effect on the 6th April 2020. However due to the outbreak of COVID 19 the changes have been pushed back to April 2021. When the changes come into force in April 2021 you, the worker will no longer be responsible for making your IR35 status determination. This responsibility will pass to the ‘nearest party, typically this is your agency or in some cases your client.
Your agency will use the HMRC Employment status tool to make this determination. This outcome is used in their Status Determination Statement (SDS).
If you would like to check your status using the tool you can by following the below link:-
HMRC IR35 Employment Status Tool
Key Factors In Determining IR35 Employment Status?
Deciding if IR35 should apply to your assignment can be complicated. However, there are some key factors which will have a big influence on your status.
Supervision Direction and Control (SDC) – How much control does your end client have on how, where, when you complete your contract. This takes into consideration both your contractual obligations and your working practices. This can be where does the work take place, who decides where it takes and is there control and supervision on how the work is completed?
Substitution – Are you contractually able to substitute someone else who is equally qualified and competent to complete the role or do you have to complete the work yourself.
Mutuality of Obligation – There are two key factors considered with regards “mutuality of obligation”
• Firstly an obligation for one party to offer work
• Secondly if work is offered, is there an obligation for the other party to accept it.
To be a true contractor you must work from one project to another without an obligation to continue working for the client beyond the framework of the original contract.
If the contract/ role specifies that the work is to be undertaken on a set number of hours per week at a set rate and undertake task as and when they are passed to you this could be seen as an indication that the role falls within IR35.
How Are You Paid – Are you paid upon completion of a task or a specific milestone within a larger project? do you have to detail specific items or tasks you are billing for on your invoices? Regular invoices for time worked can make your contract look more like a contract for employment rather than a self employed contractor billing for specific tasks.
Do You Have Any Financial Risk? – This looks at your liability for the work undertaken, if there are errors made then would these have to be rectified at your own costs?
Multiple Contracts – Does your contract allow for you to work for multiple clients at the same time?
Equipment – Do you supply your own materials for this task or are these provided by the client?
What Corporate Responsibilities Do You Have? – For example, will you appear in the client’s corporate structure.
IR35 Before And After April 2021
Having read all the factors that are determining whether your contract falls inside or outside of IR35 you’ll understand how complicated this can be? Up until April 2021 (this was originally going to be April 2020 but was put back due to the Covid crisis) this determination was down to your intermediary (or self if direct to client), for all private sector contracts. However from April 2021 the rules for IR35 determination are changing to bring the private sector inline with the Public Sector. The decision of whether or not a contract falls inside or outside or IR35 is now completely out of your hands and down to the end client.
Guidance from HMRC states:-
Before 6 April 2021 – If you’re a worker and your client is in the public sector, it’s their responsibility to decide your employment status. You should be told of their decision.
If you’re a worker and your client is in the private sector, it’s your intermediary’s responsibility to decide your own employment status for each contract. The private sector includes third sector organisations, such as some charities.
From 6 April 2021 – The way the IR35 rules are applied will change.
All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.
If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.