IR35 is a hot topic in the world of recruitment at the moment, especially when it comes to contractors and resource-as-a-service.
Here at Agile Recruit, we can’t provide you with legal advice around IR35, but we can share our interpretation of the significant changes the legislation will bring for contractors.
History of IR35?
IR35 is the term used to describe two sets of tax legislation that were introduced by the British Government. This legislation was designed to combat what they saw as being tax avoidance by contractors and the companies that hired them.
For the purposes of this legislation, the Government defined contractors as people who were supplying their services to clients via an intermediary – such as a limited company – but who would be classed as an employee if an intermediary was not used.
Her Majesty’s Revenue and Customs (HMRC) went on to say that such workers were called “deemed employees”. If contractors deemed employees are caught under the new legislation they have to pay income tax and National Insurance Contributions (NICs) as if they were employed.
As you can imagine then, the financial impact of IR35 may be significant for some contractors. In fact, it may reduce some contractor’s incomes by up to 25% if they have to pay additional income tax and NICs.
Despite being introduced back in April 2000, the IR35 legislation has been heavily criticised by both the business community and tax inspectors – and so it’s being replaced with the new Off-Payroll Tax. This was introduced to the public sector in April 2017 and will be rolled out to the private sector from April 2021.
How does the Off-Payroll Tax differ from IR35?
If you’ve read our IR35 History and Overview blog carefully, you’ll know that IR35 is the abbreviation of the name of the set of tax laws which form part of the Finance Act.
The Intermediaries Legislation, to give it its proper name, came into force in April 2000 and was integrated into the Income Tax (Earnings and Pensions) Act 2003 and the Social Security Contributions (Intermediaries) Regulations 2000.
The Government announced the Off-Payroll Reforms in April 2017, as a separate piece of tax legislation which applied to the public sector – and this is also referred to as IR35 (confusingly).
The Off-Payroll Reforms are seen by some as being an admission by HMRC that the original IR35 rules were unenforceable. Both sets of legislation are based on the theme of “deemed employment.” The Off-Payroll Reforms introduce the idea that firms not only have to now assess the status of their contractors but also pay employment fees on top of the fees they pay to the contractor
IR35 Tests of Employment
IR35 case law and employment legislation seem to be aimed at seeking to turn a one-person small business into an employee. It does this through the use of tests of employment, which have been in use for decades by the UK legal system.
In a nutshell, an HMRC inspector can attempt to disregard the written contract that is in place between a contractor and his or her client, and instead, develop a ‘notional contract’ based on what is the perceived, actual nature of the working relationship.
The tribunal judge will then use this ‘notional contract’ as a base to determine whether the existing contract is one of business to business services where IR35 does not apply or is, in fact, a contract of employment where IR35 would apply.
IR35 involves the application of three main principal tests to determine employment status:
- Control e. what degree of control does the end client have over how, where, and when the contractor completes the work?
- Substitution e. can the contractor send a substitute in their place, or is personal service by the contractor required?
- Mutuality of Obligation e. a concept where the client is obligated to offer work and the contractor is obligated to accept it
Other factors are also taken into consideration to see if IR35 applies and these include:
- Type of contract
- Financial risk is undertaken by the contractor
- If the contractor is considered part and parcel of the client’s organisation
- Provision of equipment
And so on.
As you can see, the topic of IR35 is a complex one, and one we hope to be able to shed more light on over the coming months. In the meantime, if you want to discuss IR35 and contractors in further detail, please email our managing director Jonathon Webley at email@example.com