IR35 is legislation, brought in by the Government in April 2000, to counter what HMRC class as a disguised employment.
As a contractor, your ‘IR35 status’ effectively determines your tax position with HMRC, as HMRC stated in the Dragonfly case.
Public sector body changes from 1ST April 2017
If your client is a public sector body, then from 1ST April 2017, the decision whether you are within IR35 rules or not is made by your client. The aim of the legislation is to stop people leaving full time employment then returning to the same job immediately as a contractor. This makes it possible for the previously permanent employee, working through their own limited company, to reduce their tax liability and their NI payments. If a permanent employee were to leave their company on a Friday afternoon then return to the same company on the following Monday in the same job role, HMRC would class this as a disguised employment.
IR35 changes in the private sector from 6th April 2021
In the private sector, until April 2021, it was the responsibility of the limited company being contracted to do the work to determine whether a contract is inside or outside IR35. If the contract is inside IR35, the limited company will pay Income Tax and NICs to HMRC.
After April 2021, the IR35 rules where aligned with the public sector –this means that the client is now responsible for determining the employment status of the contracts it enters into with you via your limited company. In addition, the fee payer (usually the organisation paying the personal service company-this could be either the Agency or your client) will need to deduct income tax and National Insurance from your income before you receive it.
Therefore, under these changes, the amount that your limited company will receive is the VAT element of the sales invoice raised in the limited company ( if you are VAT registered), plus the net amount of the invoice less any deductions for income tax and Employee’s National Insurance. The fee payer bears the cost of the Employers National Insurance.
The April 2021 reform uses the off-payroll working rules currently in place for the public sector as a starting point and is seeking to ensure the rules are applied across both the public and private sector.
The changes for IR35 in the private sector from April 2021 are summarised as follows:
End clients will be responsible for determining the employment status of the contracts it enters into with your limited company and provide you with an status determination statement.
The reform will not apply to small company end clients- “small “as determined by the definition of the Companies Act.
Therefore, the reform will apply to large and medium-sized end clients from April 2021.
From 6 April 2021, medium and large end clients will need to decide whether the IR35 rules apply to an engagement with individuals who work through their own limited company.
Where it is determined that the rules do apply, the end client or agency that pays the individual’s limited company will need to deduct income tax and employee NICs and pay employer NICs to HMRC.
The government is currently looking at enhancing the HMRC Check Employment Status for Tax service so that customers can receive robust employment decisions and benefit from guidance by using the online CEST tool. This will enable those working through personal service companies to assess and understand their employment status.
The government has advised that end clients should take “reasonable care” when determining the employment status of your limited company.
Part of the end client taking “reasonable care” is that they demonstrate a status determination disagreement process – as a minimum, this should consider representations put forward by the fee-payer or the company and conclude that either their statement is correct, or produce a statement with a different conclusion that states the previous one is withdrawn.
If you are outside IR35, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a Personal Service Company, in the form of dividends instead of salary, resulting in significant tax savings.
Once inside IR35, the legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary, the worker pays tax and NICs on a basis broadly equal to that an employee of the client would pay.
If you take dividends in the absence of careful consideration of your IR35 position you are putting your company and yourself at risk.
From 6TH April 2021, whether working in the public or private sector, the end client now determines the employment status of the worker contracting via his limited company.
As employment status and IR35 is so important, in this section we look in more detail at several elements, the reasoning behind Engaging as Employee or Contractor, Brookson Legal Services IR35 Status Review process and some Job Specific IR35 Considerations.
We consider the value of a Separate Contract for Each Project; provide guidance on Contract Negotiations, Contract Clauses and the implications of Not Signing a Contract. This is supported by some IR35 Case Law examples that have had a real impact on IR35 and employment status.
IR35 is still relevant if you work through an employment agency, so we also outline Agency Conduct Regulations and IR35 issues.
If your contract has the same level of risk, responsibility, liability and control as a permanent employee then you would be classed as inside or caught by IR35 legislation. This means you should pay full tax and full National Insurance (instead of the usual salary and dividends from the profits of your company) and have reduced entitlement to expense claims. This is because HMRC believes that as you aren't taking the financial risks or have the same level of control as a director of your own limited company, you aren't entitled to the same corporate tax structure.
If you are inside/caught by IR35 there may still be benefits in trading through your own limited company, however you can no longer claim travel and subsistence costs as a deduction when your IR 35 payroll is calculated under s339 ITEPA 2003.
If you have a mix of captured and non- captured assignments, then working through your company ensures all your business activities are streamlined in one business structure;
If you currently have funds built up in the company, then there continue to be tax planning opportunities for income extraction.
IR35 regulations are extremely complex but the points covered below provide a rough indicator of how you can consider your IR35 status and remain ‘outside’ IR35.
Control: Ensure you are free to work under your own control and not managed by your client.
Financial risk: Working through your own limited company you are taking an element of financial risk. You should be responsible for providing all of your own equipment, hiring individuals to assist and any other financial requirements in satisfaction of your contractual obligations. HMRC will look at all of these when considering whether you take a genuine financial risk.
Substitution: Place a clause in your contract allowing you to use somebody other than yourself to perform the task your company has been contracted to do.
Provision of equipment: Use your own equipment. It is accepted that sometimes this is very difficult and allowances are made where, for example, security measures prohibit the use of personal computing equipment.
Right of dismissal: There should be provision in your contract for immediate termination, rather than a fixed notice period as with employees, should the client choose to do so.
Employee benefits: You should not receive any holiday pay, sick pay, pension contributions, training courses, Christmas dinners or join the annual staff summer outing of a clients' business.
Please be aware that HMRC won’t just look at the above. They review all aspects of your business to establish you are a director genuinely running, managing and controlling your own limited company rather than an employee. It doesn't matter if you are working for the same client for one month or much longer periods, it’s what you're doing and your level of risk, responsibility, liability and control that count.
