The IR35 off payroll rules legislation was introduced in 2000 by HMRC.
This was to ensure that contractors working through an ‘intermediary’ pay broadly the same Income Tax and National Insurance Contributions (NIC) as an equivalent employee. HMRC believes that many contractors work as ‘disguised employees’. This means they are incorrectly describing their employment status as ‘self-employed’.
If the below conditions apply to a contractor’s assignment, IR35 legislation must be considered:
- The contractor personally performs the work for a client
- When an ‘intermediary’ is used such as a personal service company or recruitment agency. Which means the worker is not contracted directly to the client
- If the worker was contracted directly to the client, they would be regarded as an employee of the client for tax purposes.
On 6th April 2020, the changes made in 2017 to the public sector were extend to apply to the private sector. From that date, medium and large-sized private sector businesses have to determine the employment status of a contractor’s assignment. Deducting any employment taxes due and paying any tax owed to HMRC.
Are there any exemptions?
There’s an exemption for end-clients who are ‘small businesses’ (as defined by the Companies Act 2006). A small company is one where at least two of the following conditions apply:
- Annual turnover is under £10.2 million
- Balance sheet total is under £5.1 million
- Under 50 employees.
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the Person with significant control (PSC) and the changes do not apply.
Working for an Oversee Client
In cases where the end user is based wholly overseas, the rules state that the off-payroll rules do not apply. Therefore, the end client does not need to determine IR35 status, and the responsibility of determining IR35 status is then passed back to the contractor.
Status Determination Statements (SDS)
One important requirement being brought in by the new rules is that the end-client must confirm the IR35 status of an assignment. The end client should provide a ‘Status Determination Statement’ (SDS) to the PSC worker. If an agency is involved in the labour supply chain then it must receive a copy of the relevant SDS.
What factors affect my IR35 status?
The best way to evidence your assignment is outside IR35 off payroll rules is to ensure your contract, and the working practices you follow with your clients, show you are an independent contractor and not a ‘disguised employee’. HMRC will ‘look beyond’ your contract towards your working practices when they query the IR35 status of an assignment.
There are three key principles that will determine your assignment’s IR35 off payroll rules status, as shown below.
Supervision, Direction and Control
Supervision is where someone is overseeing a person doing the work. This is to ensure that they are actually doing the work and to the required standard. Supervision can involve aiding or assisting someone to develop their skills and knowledge.
Direction is someone making a person do his/her work in a certain way. This is done by providing instructions, guidance and advice as to how the work should be performed. So, someone providing direction will often coordinate how the work needs to be done.
Control is where you have someone dictating what work a person does and how or where they should go about doing that.
You can evidence that your assignment is outside of IR35 off payroll rules by agreeing on a clear set of project deliverables with your client for the duration of the assignment.
Do not take on other work for the client and do not move onto different projects that are out of the scope of the original contract terms.
Always ensure your contract clearly states the services your company (and not you personally) is providing.
You can find out more about the supervision, direction and control by visiting HMRC’s employment status manual.
Substitution
The second principle examines whether you are required to carry out the work yourself, or you can send a substitute to perform your work.
Your contract with the client should be in the name of your limited company as well as containing a clause allowing your company to send a substitute.
The right to substitution must be genuine, and you should make sure that your client could not reject any substitute you provide.
The client can satisfy themselves that any substitute is suitably skilled, qualified and passes any security clearance requirements they might have.
Mutuality of obligation
Finally, the third principle looks at whether your client must offer you work and whether you are have to accept any work they offer to you.
Mutuality of obligation is often difficult to evidence.
In general all assignments should have a minimum completion date expected and due date for payment by the client.
A self-employed worker should not expect to work beyond the contracted assignment and would not (contractually) have to accept any work offered.
In addition, you should not have a long notice period or any termination clause in your contract. In reality such clauses often indicate an obligation on the part of the client to provide you with work, and your part, to deliver that work.
Other factors affecting your IR35 status
There are a range of other indicators about the IR35 status of an assignment. The list however is not exhaustive and constantly changes based on IR35 cases examined by HMRC. If you are self-employed you should not be:
- Identified personally on the client’s organisation chart nor on the internal list of employees
- Wearing an ID card with your name and the client’s name on it. Therefore if you have a pass or ID card, these should identify you as an independent contractor and your company. They must not suggest you are an employee of your client
- Needing to attend meetings about HR matters internal to your client
- Required to take part in any appraisal as well as any performance management process for you personally or any of your client’s employees.
You must not be entitled to time off for sickness absence or holidays. Also, you should not be entitled to share options or bonuses which are the same as your client’s employees. Your contract may have an incentive for effective completion, but that must be distinguishable from any arrangements your client has for direct employees.
What steps should I take to prepare for the new IR35 rules?
Your clients may accept evidence from you about your self-employed status and to inform the SDS they will produce. Some good indicators you are not an employee include:
- Having your company own website and business e-mail address
- Holding appropriate small business insurance
- VAT registered
- Having business cards, marketing brochures, flyers, etc. for your business
- Using your own equipment on projects
- Having your own business address/office (for some will be their home).
You should also ensure your marketing materials promote your business and not you personally.
Also, make sure to update your online CVs or personal profiles on social media. They need to represent your business correctly as a contractor, promoting your own business, and not you personally which means:
- Talk about your ‘professional experience’
- Mention your status, company name and business e-mail address
- Describe how you can deliver benefits to a client’s businesses
- Last but not least, have ‘recommendations’ about your business and not your personal ‘references’.
What if your client determines you are inside IR35?
If you are inside IR35 and your client pays you after 6th April 2020, they will deduct the necessary income tax and NIC and pay this over to HMRC.
It is important to remember that IR35 status is based on each individual assignment. Therefore if you are working on a number of assignments, some ‘inside IR35’ and some ‘outside IR35’, you need to make sure you have the right accounting processes in place.
What about business expenses?
The business expense rules for contractors working on contracts inside IR35 are very strict.
More specifically, you cannot usually claim for things like normal travel to and from work or subsistence if your contract with an end client is inside IR35. Your tax status will be the same as the employees of the end client.
HMRC recognises you incur expenses in running your limited company. HMRC allows you to calculate the employment tax you owe based on 95% of the amount your company receives from your contracts which are inside IR35.
You need to be aware that the allowance does not apply to any contracts deemed to be inside IR35 off payroll rules by your public sector clients.
The government has extended these rules to the private sector from 6th April 2020.
The new rules, will remove the 5% allowance for PSCs to meet the costs of administering the off-payroll working rules. The allowance however will continue for PSCs working with ‘small’ end-clients in the private sector.
How does the 5% allowance work?
The allowance is part of the company’s taxable profit, and it remains within the retained profits. The amount however can cover normal business expenses such as accountancy fees, cost of running payroll, promotional and marketing costs for your limited company. If you don’t have any business expenses, you’ll pay corporation tax.
The IR35 rules are complex and you should contact your accountant in case you need further clarification or review of your current contract. If you’re interested in finding out more, call us on 01865 548465 or use our online contact form.
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