What is IR35 and am I outside of the scope?
Are you aware of the tax legislation IR35? It stands for Inland Revenue (now HMRC) 35 (the press release issue number).
It was originally introduced when HMRC detected a growing trend for individuals to provide what were essentially employment services through the medium of a personal service company (PSC), primarily to avoid PAYE and National Insurance.
IR35 rules will apply in situations where the worker would be treated as an employee of the contractor, if the personal service company did not exist.
Here’s what you need to know about defining the scope of IR35 when it comes to your contracts.
So, what does it mean to be inside the IR35?
If you are deemed by HMRC to reflect a service of employment, not self employment you must pay income tax and National Insurance Contributions just like employees do.
What does outside the IR35 mean?
When you’re outside of the scope, HMRC see you as self-employed and you’re able to pay yourself in a tax-efficient way, but your contract must reflect you and your client’s actual working practices and include details of the services you’ll be providing, and when and where you’ll be working. If you offer services, rather than a contract for a service, then you’re likely to fall outside of IR35 as you could send someone to do the work in your place, for example.
There are multiple factors to consider if effectively self-employed:
- No Control – There must be no or absolutely minimal control over PSC by contractor.
- No Mutuality of Obligations – To be self-employed, PSC have to show that they can turn work down. If there is an obligation for Contractor to have to regularly give work to PSC and PSC have to accept it, there would be mutuality of obligation and PSC would caught by IR35.
- Right of Substitute – This is sending another suitably qualified person to do the work on the companies’ behalf.
- Insurance – PSC buys their own insurance for the work they done.
- Provision of own Equipment.
When you only receive income from one company for a considerable period, this could be challenged by HMRC as employment income which would come under rules of IR35.
How do I know if my business is inside or outside the scope?
Every medium/large business is responsible for setting the tax status of its contractors. If this tax status is not confirmed, you will be responsible for any fees and penalties.
IR35 is taken on a case-by-case basis by HMRC, and it can be assessed at any time. Other factors are considered, but HMRC advice is to consider all factors that are present.
To assist you, here is a quick test: https://www.gov.uk/guidance/check-employment-status-for-tax
It is important to ensure that you are honest and clear with your answers to ensure that your status is correct, should you have to defend yourself to HMRC at any point. It is always a good idea to do regular reviews of your contracts and agreements to ensure you fall outside IR35.
To use this free Gov tool, you’ll need:
- Details of the contract
- The worker’s responsibilities
- Who decides what work needs doing
- Who decides when, where and how the work is done
- How the worker will be paid
- If the engagement includes any corporate benefits or reimbursement for expenses
Do you still have unanswered questions?
It’s always best to consult an expert before making any decisions over your IR35 position. If you do find yourself needing further information, or believe you come under IR35, please contact us today and we will be happy to help.