IR35 – Extension of the Rules
What is IR35?
With effect from 6 April 2000, HMRC introduced legislation designed to tackle the topic of disguised employment and these rules are usually referred to as IR35.
They were designed to tackle the issue of contractors taking advantage of tax the tax efficiency of working through a limited company when realistically they are working as an employee.
The rules will usually apply where a worker is providing their services through an intermediary – usually their own service company.
The rules ensure workers who would have been an employee is contracted directly to the client are paying a similar level of tax and national insurance as employees.
Who is affected?
The rules may impact you if you are one of the following:
Worker providing services through an intermediary
Client receiving services from a worker through their intermediary
Agency providing workers’ services through their intermediary
Tax and National Insurance would need to be deducted when making payments.
Key IR35 Factors
HMRC use an employment status test to establish if an assignment is caught by IR35 or not.
The test considers the following factors:
Mutuality of Obligation– is the company obliged to provide the work and is the individual obliged to accept it
Control– can the individual control how and where they work or is this dictated by the company
Substitution– can someone else be sent in the place of the individual – e.g. subcontract
Equipment– does the company provide the equipment or is the individual required to provide own equipment.
Financial Risk – how much risk is the individual taking on? Are they quoting by the job or paid regardless of how much work is done?
Benefits– are there any benefits received by virtue of the contract
The above is a brief list of the main factors, there are many additional factors to consider.
Pre 6 April 2020
As it stands, if you are contracting in the public sector, the onus is on the client to establish your employment status whereas if you are in the private sector the responsibility falls on the intermediary.
Post 6 April 2020
With effect from 6 April 2020, the rule that the responsibility of determining the status of the contract is that of the client is being extended out to firms in the private sector which are of medium or large sized.
If the services are being provided to a small client in the private sector, the intermediary will remain responsible for deciding the employment status and if the rules will apply.
If you are caught by the legislation the impact is that you are required to pay the tax and national insurance that would be due on your income as this is your deemed employment income.
Take the total income received by the intermediary
Add payments made directly to the worker by the client
Deduct any allowable expenses incurred in the tax year
Deduct capital allowances and pension contributions
Deduct any Class 1 and 1A NIC paid by the intermediary
Deduct any salary and benefits already paid by the intermediary
Compute the employer national insurance contributions on the deemed payment
Where contractors are caught by IR35, they may choose an Umbrella company to be their intermediary. In an umbrella company IR35 is NOT an issue, Income Tax and NIC is deducted by the umbrella before payment to the worker.
If a worker decides to undertake a contract via a PAYE umbrella company, they become the employee of the company, and the umbrella is their “employer”.
The umbrella company will deduct the tax and NI and will also deduct the employers NI which is a cost that will be passed on to the worker.
They will also deduct their cost for the service being provided.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.