If you are an IT contractor or are thinking about becoming one, IR35 must be familiar. If you have heard of it and are a little confused, then don’t worry – you’re not alone!
IR35, the name given to the intermediaries legislation that came into force in April 2021, is complicated legislation that is a little hard to understand. Agile Recruit takes a look at the ins and outs of IR35, the impact it could have on IT contractors, and how you can make sure you keep on the good side of HMRC.
What is IR35/Off-Payroll tax?
IR35, or the Off-Payroll tax rules, were created by HMRC to help tackle the problem of tax avoidance and protect employees’ rights. This has been done by targeting contractors who work through limited companies and those companies that hire them.
If HMRC classes you as being ‘inside’ IR35, then this means that they believe you are working as an employee rather than an actual IT contractor. This has profound tax implications for both the contractor and the company employing them – as both will end up paying more.
This is why it is so vital for IT contractors to have a good understanding of the IR35 legislation.
Why was IR35 introduced?
In 2021, HMRC revealed that the tax loss in Britain through non-payment, avoidance and fraud was around the £35bn mark. This was a big driver behind the introduction of the IR35 legislation, as the government was looking for ways to reduce this number.
The government wanted to tackle the rise of two bad practices:
- Disguised Employees: Contractors who work the same way as full-time employees but bill the company for their services through a limited company as tax-efficiently as possible.
- Monday-Friday Phenomenon: This is similar to disguised employees and covers contractors who work in a company 40 hours a week, using company equipment, but were not able to access employee benefits.
Having said this, it is not all doom and gloom; most contractor/employer relationships are genuine, and there are many sole trader limited companies operating quite happily within the UK.
What does being inside or outside of IR35 mean?
If HMRC deems you as being “inside IR35” then it is decided you are a disguised employee of the company, which means you would lose your contractor tax advantages. Therefore, you would need to pay tax as though you were an employee, but you would not be able to claim employee benefits, such as holiday or sick pay.
If you are deemed “outside IR35” then you are considered a genuine contractor, and both HMRC and the company that hired you believe you are genuinely self-employed, so you can carry on operating in a tax-efficient way.
What are the IR35 rules?
When deciding whether you are inside or outside IR35, HMRC uses specific “relationship criteria” to determine the actual employment relationship. These criteria include:
- Mutuality of Obligation (MOO)
- If a client is obliged to offer you work and you are compelled to take it, this would be deemed a contract of employment, and you would fall inside IR35.
- If you can work on a project-by-project basis for more than one client, and no client is obliged to offer you another contract once your existing contract has ended – then you would be deemed to be outside IR35.
- If you can put other workers forward to complete the contract work on your behalf, then you are outside IR35.
- If you personally have to complete the contract, then this will place you inside IR35.
- Supervision, Direction and Control
- If you want your contract to fall outside of IR35, you need to control how you complete the required work.
- If the client sets your working pattern and directs how you complete the work, this will likely fall inside IR35.
If HMRC deems you “outside IR35” then you are free to invoice your client and pay yourself through your limited company. If HMRC believes you to be “inside IR35”, you will need to pay tax and National Insurance the same way an employee does.
What changes have there been to IR35 in the public and private sectors?
When the IR35 legislation was first introduced, employment status was decided by the contractor. This changed in the public sector in 2017, when the onus changed from the contractor to the firm hiring them.
This change in onus was extended to the private sector in April 2021, meaning both public and private sector employers are now responsible for determining the IR35 status of any IT contractors they hire.
If you have any further questions about any of the IR35 reforms, please feel free to email Jonathon Webley (Managing Director) at firstname.lastname@example.org or ring him directly on 0161 416 6634 or 07941 798 021.