Protests against IR35 took place last week. The protestors went to Westminster as they are against the new legislation.
They say it will be ‘disastrous’ for many small businesses who need to hire contractors.
But what is IR35 and will it affect you? Here we look at the legislation being introduced in April.
What is IR35?
The legislation was introduced way back in 2000 but it won’t affect most contractors until April this year.
This is because all private sector contracts will be subject to the law. It has been part of public sector contracts for some time.
Government ministers introduced IR35 to counter alleged tax avoidance via the use of ‘service companies’ which are effectively one-man bands.
Such individuals set up a limited company and the business hires the ‘company’ as a contractor. This isn’t a problem unless the person involved is effectively working as an employee.
If the contractor has only one client and works at their premises five days a week for months on end, HMRC views this as being ‘disguised’ employment. They see such contractors as ‘off-payroll’ workers.
Hiring workers in this way means the hiring company or organisation doesn’t have to pay National Insurance contributions or give contractors employee benefits.
For the contractor, it is more tax-efficient to work this way.
But the legislation is complicated and even HMRC isn’t clear about it.
Contractors fear that the changes may lead to less work as organisations don’t want the burden of turning the contracts into full-time employment with the costs that go with it.
Why is it now making headlines?
The truth is IR35 has made a lot of headlines since its introduction. But until April this year, it hasn’t affected the smaller private businesses who often need short-term workers.
Pressure groups and contractor organisations are now demanding a full review as they fear the changes could mean many contractors will lose out.
Small business owners are also concerned as without such contractors they may have to scale things down.
What are the rules?
There are many nuances under IR35 and this blog is only a guide. But put simply there are two rules for public and private sector contracts at the moment.
This will change in April 2020. Until then:
- Public sector contracts: The hiring organisation is responsible for working out whether the contractor falls inside or outside IR35. If they fall inside, the hirer, agency or whoever pays the contractor needs to deduct tax and NI contributions and report them to HMRC.
- Private sector contracts: The contractor is responsible for working out if they fall inside or outside IR35. If they’re inside, they need to pay the tax and NI contributions. From April, all private sector organisations will need to follow the public sector’s rules. That means they will be responsible for working out IR35 and make the necessary payments via payroll.
Am I compliant?
If you are a contractor there are a few principles. You should see whether the contract specifically mentions these principles.
- Supervision, direction, control: This relates to how much influence your client has over how you complete your work. An example is if the client insists that you have to work certain days and times.
- Substitution: Could you bring someone else in to complete the contract? If you can’t you are likely to be within IR35.
- Mutuality of obligation: Is there an obligation that the employer offers work and you have to accept it? If so, the contract may fall into IR35.
Here are a few more points HMRC may use to check to see if you are a contractor or a ‘disguised’ employee:
- Equipment: HMRC often try to argue that if any equipment is provided by the client, and you don’t use your own, you’re a disguised employee.
- Financial risk: Self-employed contractors usually take a degree of financial risk, as any business would. Are you responsible for errors made during the contract, and would you need to rectify them in your own time? There’s usually a requirement to have professional indemnity insurance.
- The way you’re paid: Self-employed people are paid on a project basis, which might mean when the work is completed or at particular project milestones.
- ‘Part and parcel’ of the organisation: If contractors become part of a company’s structure, such as people reporting to them, this points to employment rather than self-employment.
- Exclusivity: Do you work for other clients? Typically the self-employed can work for multiple clients at once.
- Intentions of the parties: The contract should make sure the relationship between contractor and client is one of supplier and customer, but this should be genuine. If HMRC find the intended relationship is more like an employee and employer, they’ll ignore the contract.
- Business ‘on your own account’: Essentially this determines whether you’re running your business as a business. If you have things like a business website, a dedicated office space, and even employees, you could be seen as operating a business. If not, you are likely to be seen as an employee.
As you can see, there are a lot of complex criteria that could mean you as a contractor or employer could fall foul of IR35 rules.
As we have said, each case is individual so only use our blog as an initial guide. Contact us and we can discuss your case.