Please see below a list of our frequently asked questions related to IR35
IR35 (also known as the Intermediaries Legislation) is a law that came into force in 2000.
The main purpose of IR35 is to identify whether someone working as a self-employed contractor is really an employee, as this has significant implications for how tax is calculated and paid.
Although HMRC is keen to look closely at anyone running a Personal Service Company (PSC) there is no official definition of a PSC.
Typically, a PSC is a limited company that has a sole director who owns most, or all, of the company’s shares. There’s less risk involved for a contractor to set up as a limited company (rather than a sole trader) as the company is liable, rather than the individual.
Operating as a limited company makes the distinction that the contractor is self-employed; not employed. However, the HMRC don’t always agree and, in some cases, consider the Personal Service Company business model to be a means of disguising employed status.
A worker who is contracted to fill a position (often permanent) within a company, who is paid on a contract basis to avoid the tax and National Insurance associated with employment (PAYE).
If you’re a contractor providing a service to one client on a long-term basis you are at particular risk of being caught under IR35, as you could be considered to be a ‘hidden employee’.
You need to take IR35 seriously and do everything you can to protect yourself against it, as the financial implications could be devastating.
Put simply, if you’re inside IR35 you should be taxed as an employee. If you’re outside IR35 you can pay yourself a combination of salary and dividends from a limited company.
The tricky part is determining whether you’re inside or outside IR35.
If you were investigated by HMRC and found to be an employee (caught under IR35) you could:
• Face an unexpected bill for tax and National Insurance Contributions
• Lose the ability to claim allowable expenses
• Experience a reduction in profits/take-home pay
• Incur a hefty fine from the HMRC
At best, an investigation by HMRC would be an uncomfortable, time-consuming and stressful experience.
HMRC introduced an online tool - Check Employment Status for Tax (CEST) which you can use as a guide - but this has come under extreme criticism across the industry.
IR35 is complicated - there are many grey areas.
We recommend that you get a thorough Contract and Working Practices Review from an expert. Nicola, our Founder, has worked in the contractor industry for 9 years and has a wealth of experience in IR35 - get in touch for more details.
When assessing your IR35 status, you should consider the following factors, and bear in mind that these are the factors HMRC would look as if you were involved in an IR35 review.
3. Part and Parcel
5. Mutuality of Obligation
6. Financial Risk
One of the key indicators or tests of IR35 status is Control.
To work outside IR35, the contract and working practices must demonstrate that you (the worker) have significant control over the work that is done including how and when the work is carried out. If the contract indicates that the client has a high level of control - this points towards a status of employment.
One of the key indicators or tests of IR35 status is Substitution.
To work outside IR35, the contract and working practices must demonstrate that you (the worker) have the ability and right to send a replacement/subsitute worker in your place. It is important to note that it is not always enough for the contract to state that you can provide a substitute if in reality, that would not be possible.
One of the key indicators or tests of IR35 status is whether a worker is seen as Part and Parcel of the business.
To work outside IR35, the contract and working practices must demonstrate that you (the worker) are independent and work accordingly. It is important that there are clear differences between the way a contractor and an employed member of staff in the same workplace are treated and perceived.
For example; being provided with a company parking space, access to company benefits and being referred to as integral to the business, would point quite clearly to a status of employment.
It’s all about how you pay your tax.
As a freelancer/contractor, working through a personal service company (PSC) gives you the advantage of being able to claim business expenses before tax is calculated, whereas an employee has to pay tax and National Insurance from their full pay.
If an investigation went against you and you were considered to be an employee, your NI contributions and tax would be deducted at source through the employer’s PAYE system.
Please don’t bury your head in the sand about IR35.
It’s fair to say that IR35 is an unpopular law. But, as things stand, it’s very much in force and it isn’t going away any time soon.
Put it this way – if you’re investigated by the HMRC for IR35, you will find this uncomfortable and stressful, at best. If such an investigation goes against you, the HMRC could choose to look closer at other existing, and past, contracts.
The financial implications are serious and could even put you out of business. So you need to make time to check your position and act accordingly.
This depends who you’re providing services to.
If you’re working in the private sector, then it’s your responsibility to determine your status, however this is likely to change this year.
If you’re working in the public sector then it’s the responsibility of your public sector client to determine your status. This came about following a change in legislation in April 2017 and there’s a government consultation in progress to extend this to private sector clients.
We will keep you informed of any new developments or changes to IR35 legislation as and when they happen.
HMRC does have an online tool you can use for determining your status, known as CEST (Check Employment Status Tax).
HMRC states that the test is anonymous and doesn’t store your personal information or result. It’s not compulsory to use the tool, which has been widely criticised.
If you prefer not to use the tool, you can use other methods to determine your IR35 status
At Effective Accounting, we can provide a full IR35 contract and working practices review to help you minimise the risk of being investigated and build a strong defence if you are.
Like most laws, IR35 is complex and open to interpretation but there are things you can do to minimise your risk of being caught under IR35.
It’s all about having a clear understanding of your own working practices and contracts you take on. You need to be absolutely clear on your position, so that you’re able to provide evidence and argue your case in the event of being investigated.
The following evidence will help you to plan ahead and have a defence in place, if needed:
• Proof that you are a company director, not an employee (you’ll need to be able to demonstrate that you have the same degree of responsibility, control, risk and liability as other company directors in your industry)
• A contract review
• Documented working practices
If HMRC decides to investigate, they will write to you requesting evidence to prove that you don’t fall within IR35. If they’re not satisfied with the evidence you provide and think you may fall within IR35 they will request a face-to-face meeting.
Some areas that will be taken into consideration are:
• Mutuality of obligation (MOO) As a contractor, you shouldn’t be obliged to accept continuous work from a client and they shouldn’t be obliged to offer it. Any contract between you should make it clear there’s a fixed amount of work to be carried out, that will be invoiced and paid for upon completion. If the client offers further work and you accept it, a separate contract should be created outlining the scope of the new project. But beware a ‘rolling contract’ of continuous work, as this could raise questions and be looked upon unfavourably.
• Personal service company (PSC) The HMRC will look at a personal service company, typically a limited company owned by one contractor, to identify whether the contractor would in fact be an employee without the limited company. If they decide your status is that of an employee, you stand to lose the tax advantages of being self-employed.
• Supervision, Direction and Control (SDC test) This is about whether you’re managing yourself and working independently, or taking orders from another person about how and when you do the work. The SDC test looks closely at whether you are working independently or being supervised, directed or controlled. The key word here is “or” – meaning that if only one of these is found to be present you can fail the SDC test.
If you’re caught under IR35, remember it applies to the contract you’re working on and not you as an individual. It doesn’t mean that you’ll be caught under IR35 on all your contracts.
However, the HMRC is likely to look closely at your other contracts, which would be uncomfortable and potentially incur further costs.
If you lose, can appeal to a Tax Tribunal or ask HMRC staff to consider your case (although these won’t be the same staff who dealt with your case). If you disagree with a Tax Tribunal’s decision, you can ask higher courts to consider your appeal, however this will be costly. Most legal cases have been lost.
Yes. Effective Accounting is a contractor specialist.
This means we can:
• Review your written contracts and working practices
• Put together a basic or detailed report, depending on your needs
• Collaborate with you to find any issues and amend your contract/working practices to improve your IR35 status
Take action now and you can have peace of mind that you’ve done everything you can to minimise the risk of being investigated and defend yourself if you are.
Get in touch and we’ll talk you through.
Telephone: 01908 563250
Effective Accounting Ltd
1 The Oaks
Mill Farm Courtyard
Effective Accounting are contractor and IR35 specialists.
We have extensive knowledge of the legislation and follow the changes within the industry carefully to ensure we are ahead of the game for all our clients.