The countdown has begun - are you ready?
Are you a self-employed contractor in the Private Sector? Are you paid ‘off-payroll’? If the answer is ‘yes’, then this article is for you. In the public sector, for the last twenty years, HMRC has applied strict rules about contractors being treated as ‘disguised’. From April 2020, the same conditions will apply to the Private Sector. With the deadline now less than 12 months away and looming fast, you need to find out whether these new regulations apply to you - and you need to find out fast.
HMRC has designed IR35 to assess whether, for the purposes of paying tax, a contractor is a genuine contractor or a disguised employee. If you’re a contractor working through a limited company, you’ll enjoy considerable tax efficiency. On the one hand, you won’t be enjoying the benefits of holiday and sick pay. On the other, you’ll have control and flexibility over your work.
The times they are a-changin’
The trouble is HMRC regard this arrangement as a loophole – one that they are determined to close out. For years, some contractors (and their hirers) have taken advantage of the system by making out that they’re a self-employed contractor, when in reality, they’re working as an employee. The employer gets away without paying employers’ National Insurance contributions or employee benefits. You benefit with improved tax efficiency. Everybody wins … until now.
From April 2020, you will have to be IR35 compliant. If you’re ‘inside IR35,’ HMRC sees you as an employee and you’ll face conventional income tax and National Insurance payments. If you’re ‘outside IR35’, then you’ll be able to continue to enjoy the benefits.
On face value, this might seem straightforward. But it isn’t. Even HMRC seems to struggle – there have been several recent high-profile tribunals where they have lost their case against contractors – most famously, daytime TV Host, Lorraine Kelly. As ever, the problem is guidelines that lack clarity.
IR35 rules for limited companies - when do they apply?
HMRC states that, when deciding whether IR35 applies to a contract or engagement, a Limited Company must define the employment status of the contractor. If the contractor “would be an employee if there was no intermediary”, then the new ‘off-payroll’ rules will apply. (The ‘intermediary’ is usually the contractor’s limited company set up for the purpose of the arrangement – often called a personal service company).
Public versus Private sector
In the Public Sector – the responsibility for defining and applying the IR35 status of its contractors lies with the employer. If they decide the contractor lies ‘inside IR35, then they are responsible for deducting NIC and tax.
In the Private Sector – Until now, the contractor has been responsible for working out whether they fall inside or outside of IR35. If they’re inside, they need to pay the tax and NICs due.
From April 2020, this distinction will cease.
In the Private Sector, the responsibility for determining their contractors’ status will lie with the employers. Both businesses and contractors need to start preparing for the change – now.
So – am I IR35 compliant?
Here are some, but not all, of the questions you need to ask –
• Is the contract for clearly defined ‘services’? If so, then usually IR35 won’t apply. But you need to check these three principles –
1. Supervision, Direction, Control
How much say does your client have over how you carry out your work. For example, do you have to work during specific hours on specific days? If so, this suggests employment
Could you bring someone else in to complete the contract? Or do you have to do the work yourself? If the latter, then you’re probably within IR35.
3. Mutuality of Obligation (MOO) – is the employer obliged to offer work, and do you have to accept it? If the answer is ‘yes’, then you will fall within IR35
• Can you work for other clients simultaneously? If not, then this strongly suggests that you’re an employee – not a contractor.
• What about equipment? Do you use the client’s or your own? If it’s the former, then this points strongly to you having employee status?
• Financial risk – Are you financially responsible if things go wrong? Do you have professional indemnity insurance? If so, this helps to define you as a contractor.
• Status within the organisation – Are you treated as an integral part of the company? Perhaps people report to you and you have your own office within the company building. This implies strongly that you have employee status.
• Do you have a clear business identity – perhaps with your own website. Maybe you have your own employees. This would clearly identify you as a contractor.
These are the main points to consider. But of course, there are so many grey areas. What really matters is that you’re absolutely clear in the relationship with your hirer before you start the contract. Think carefully about each of these issues.
And, of course, don’t leave anything to doubt. If you declare to HMRC that you’re outside IR35, when in fact, you’re inside, then years later, if HMRC reaches a different conclusion … well, we wouldn’t like to even think of the back taxes you might be subjected to.
Help and advice for a range of business issues
There is an HMRC online tool for testing contractors’ IR35 status. The trouble is – it’s far from fool-proof. If you’re in any doubt at all about your status, you really should check with an IR35 specialist. That is, of course, where we come in. We’ll give you all the guidance you need. You’ll be able to sleep easy in the safe knowledge that you’re IR35 compliant.
This legal information is not the same as legal advice and you may not rely on our post as a recommendation of any particular legal understanding. Please, consult an attorney if you’d like to get advice on your interpretation of this article.