IR35 – what businesses and contractors need to know
What is IR35?
The off-payroll working rules, commonly known as IR35, are a set of regulations designed to clamp down on tax avoidance via disguised employment. This is where workers with the rights and expectations consistent with an employee incorrectly operate as contractors through a personal service company (PSC). Businesses and contractors inside the remit of IR35 are liable to pay further tax (along with penalties and interest), while those outside its remit are unaffected.
How is IR35 changing?
Currently, only public sector clients are required to assess the IR35 status of contractors. In the private sector, this responsibility lies with the contractor’s PSC. However, from April 2021 this is changing, with private sector clients being made to conduct IR35 assessments instead of the contractor’s PSC.
How might this affect businesses and contractors?
IR35 is a complex piece of legislation, so much so that HMRC itself has lost the majority of court cases concerning IR35. Businesses may fear the prospect of a lengthy HMRC investigation, which can trace back as far as six years. This means many businesses may force legitimate contractors to be classed as employees, or cease working with contractors for good.
Am I inside or outside IR35?
Although HMRC offers an online tool, called CEST, it is only a rough guide when it comes to tax obligations. Various industry and trade bodies have spoken out on the issue, claiming that the tool is misleading. This is because IR35 legislation is all about the detail: it concerns itself with the relationship between the two parties. Those outside IR35 fall under a relationship between two businesses, while those inside IR35 have a relationship similar to that of an employer and an employee.
How can I steer clear of IR35?
Remaining outside IR35 is about not taking on the characteristics of an employee. Ways to do this include:
• Avoiding submitting an incorrect or late tax return, as this may be the starting point for a HMRC investigation. Use a qualified accountant to manage this for you.
• Not taking typical employee benefits, such as pensions, training and tools, whilst ensuring that you don’t have defined working arrangements, like minimum hours. Project-based, rather than time-based work is more likely to fall outside IR35. Record this information, as well as client correspondence, in a contractor’s log, ready for a possible investigation or tribunal.
• Getting the contract reviewed by an independent expert, such as a solicitor, who can determine the IR35 risk for both parties. Confirm with the firm that you are working outside IR35, and mention this in the contract. Ensure you are not named in the contract – this is important as contracting companies must be able to demonstrate a right of substitution.
• Professionalising your PSC: ensure that its title does not refer to your name, produce a website and marketing materials, and take out appropriate indemnity insurance.
• Avoiding mutuality of obligation, where the firm is required to provide work and the worker is required to carry it out. Exercise your right to reject work.
• Contracting for multiple clients simultaneously, which will prevent HMRC suggesting that you are an ‘economically dependent’ employee, working inside IR35.
Contact Quilfords today to learn how we can help contractors stay within tax laws.