IR35: two letters and two numbers that are enough to strike fear in the hearts of the self-employed.
But fear not: Contractor Supermarket Limited is on-hand to make IR35 easy.
IR35 is often bogged down with boring legal jargon and technicalities, which causes panic. Luckily, Contractor Supermarket Limited doesn’t do jargon, doesn’t do boring, and doesn’t create unnecessary drama.
IR35 isn’t as complicated as it’s frequently made out to be.
We thought it worth clarifying at this point that IR35 doesn’t apply to those operating through umbrella companies, permanent employees on a PAYE payroll, or self-employed sole traders.
IR35 only applies to workers operating through limited companies or limited liability partnerships. If either of these applies to you, then read on.
Back to basics: what is IR35?
• IR35 stops people from avoiding tax
• It was created to tax “disguised employment” at a rate similar to regular employment
• “Disguised employment” can mean workers who receive payments from a client via an intermediary i.e. their limited company
• “Disguised employees” can also mean employers who would be employees of the client if it wasn’t for their limited company
• An individual operating through a limited company when they should be working as an employee can make significant tax savings
• In the eyes of the HMRC, this is classed as tax avoidance – which we all know is very naughty and can land you in a lot of trouble
• The aim of IR35 is for the HMRC to determine whether you’re legitimately self-employed, or whether you should be on the PAYE payroll of a company
An employee on a PAYE payroll will pay more tax than a limited company contractor. IR35 stops people leaving work on a Friday as a permanent employee, only to turn up on Monday morning declaring: “I’m now a limited company contractor and pay less tax” – which is understandable.
Does IR35 apply to me?
To fall outside of IR35, your working practices and contracts need to be different from those of permanent employees.
To find out if IR35 applies to you: answer the following questions with a simple ‘yes’ or ‘no’.
If the answers are ‘yes’, then it’s highly likely that IR35 does apply to you.
The questions have been broken down into three categories.
• Mutuality of obligation (MOO)
Do you have to work a notice period if you want to leave?
Is the client legally obliged to give you work, and are you obliged to take it?
• Personal service
Are you required to personally carry out the work, rather than having the freedom to assign the task to another person of your choice?
Does the client control how, when and where you complete the work, rather than you deciding on how, when and where you complete the work?
You can also try HMRC’s IR35 test.
Who determines if IR35 applies to me?
HMRC introduced the IR35 legislation way back in April 2000, so you may be wondering why there is suddenly a lot of noise around it. The IR35 rules haven’t changed, but who determines if a worker falls in or outside of IR35 has
Historically, it was the managing director of a limited company’s responsibility to define their IR35 status.
In April 2017, the responsibility switched from the director of the limited company to the organisation the individual is doing the work for.
Should the worker be caught by IR35, it’s the responsibility of the party paying the limited company to make the appropriate tax or National Insurance deductions. This fee payer could be a client, a recruitment agency or an intermediary company.
Can I challenge an IR35 decision made by HMRC?
You have the right to formally appeal an IR35 decision – check out HMRC’s appeal process.
Can my IR35 status change?
Yes. It’s your contract that holds an IR35 status, not you.
What are the penalties around IR35?
When it comes to HMRC and paying tax, you can be severely punished if you mess up, even if it is unintentional.
With the update to the IR35 legislation in April 2017, a limited company director can no longer be liable for mishaps as they are no longer involved in the IR35 decision process. It’s down to the fee payer, so HMRC will pursue them, not you.
If the HMRC decides that you fall inside of IR35, you could end up paying all the tax you would have paid as a permanent employee.
It’s best to be clear on IR35 to avoid any nasty surprises landing on your doormat.
Got further questions? Our team of experts will be happy to help: 0800 066 2756.