IR35 was introduced in 2000 to ensure that a freelance worker pays the correct amount of tax.
It was designed to stop people who were in practice working like employees from operating through a limited company in order to pay less tax.
While many people choose to use a limited company for reasons other than tax (credibility, protection from personal liability etc), IR35 legislation gives HMRC the ability to unpick an arrangement they feel is being used for the wrong reason. The legislation focuses on situations where the relationship between the contractor and the end user is considered to be that of a traditional employee/employer set-up. Where this is the case, tax-related benefits that would be open to limited company contractors, such as the ability to claim tax relief on a range of business-related expenses, are closed and contractors have to pay via the traditional PAYE rules that apply to employees. A few years ago, IR35 rules were changed, removing responsibility for IR35 compliance from you, the contractor, to the end hirer and other organisations involved such as a recruitment agency where the contractor provides services to a medium or large client or that client is in the public sector. This is why, in many cases, the IR35 status is already determined before you start a role.
What factors influence whether a role is inside or outside IR35?
To decide if a role is ‘inside’ or ‘outside’ IR35 it’s necessary to examine the contract and the actual working practices as a whole and this will indicate whether the scenario looks like an employee/employer relationship. There are many factors to consider but the main factors which are considered are: Mutuality of obligation (MoO) This is the principle that an employer and employee are obligated to each other. For example, if the employer is obliged to supply a continuing opportunity to work, or to pay a notice period if no work is available, and if you as the contractor are obliged to serve a notice period. Right to substitution To be outside IR35, you should be able to replace yourself with a substitute of your choice. The organisation requesting the assignment can make only reasonable demands regarding a substitute, such as a particular trade credential or level of experience. Supervision, direction & control (SDC) To be ‘outside’ IR35, you should not be controlled in how you deliver the assignment. You should have autonomy in terms of how you perform the role. Financial risk If you could suffer financial loss then that would be another indicator that you are not subject to IR35. Do you need insurance? If work is not completed satisfactorily, will you have to put it right, without charging or being paid for those corrections? Behaving like an employee If you behave like an employee, if you’re on the holiday rota or use a lot of end user equipment, for example, then this could indicate a role is inside IR35.
Adapting Your Approach
If all the assignments you are carrying out are inside IR35 then you may wish to consider your options, which include:
- Negotiate a higher rate of pay If your assignment is inside IR35 you will have to pay more tax than if it was not subject to the rules. Whilst you may be happy to accept a lower take-home pay, you could seek to mitigate the impact by negotiating a higher rate of pay with your end client.
- Take on a mix of contracts Another option is to look at taking on additional contracts which are not subject to IR35, that way you mitigate some of the impact on your take-home pay.
- Become an employee You might consider joining your end hirer as a regular employee, if they will make that option available. Whilst you will still pay tax like a regular employee, you will have access to employment benefits such as holiday pay and sick pay. There may be an impact on your overall rate of pay when becoming a permanent employee.
- Join Workwell Umbrella When you join an Umbrella, you’re considered an employee of the Umbrella company, and taxed via PAYE. With a compliant, FCSA-accredited Umbrella like Workwell, you enjoy the flexibility of being a contractor whilst also having employment rights such as sick pay, holiday pay and access to a company pension.
Get tailored support
Our specialist contractor accountants are here to answer any additional questions you may have about IR35. Please get in touch on 01923 257257.