The intermediaries legislation – more commonly known as IR35, is a piece of anti-avoidance tax
legislation to combat what HMRC call “disguised employees”. It applies to contractors who supply their services through a limited company, known by HMRC as a personal service company. It requires the PSC to pay equivalent employment tax to directly engaged employees i.e PAYE tax and NIC if the reality of the work is akin to employment.
Since the introduction of IR35, it has been the responsibility of the PSC to determine whether they were working inside (i.e. effectively an employee) or outside (i.e. a genuine self-employed contractor in business on their account) of IR35 and to pay the appropriate taxes due.
Who is going to be responsible?
From 6th April 2020, except for some smaller end user companies, the responsibility of determining status moves to the end client. Where the contractor is deemed inside IR35, the rules also make the fee payer (recruitment company) responsible for the contractor’s tax and NIC, as well as the employer’s NIC. Check your obligations carefully.
Is the method by which status is assessed changing?
The actual method by which status is assessed is not changing. There is simply a change in responsibility in who determines the IR35 status of the contractor. If a contractor is legitimately outside IR35 today, then they should continue to be outside IR35 after April 2020. It is also important to remember that HMRC’s own view is that one-third of contractors should be caught by IR35 – meaning the majority are still outside.
Is there a basic rule?
Yes; if the engagement between the end client & contractor looks and feel like employment, it is more likely IR35 will apply. The contractor will need to clearly demonstrate that there is an absence of at least personal service, right of control or mutuality of obligation to show that IR35 does not apply.
What is right of control?
The level of control exercised by the client over the services to be provided. What is the scope of the work, how is it going to be provided, who is providing it, when is it going to be provided, and where is it to be provided is highly important for determining IR35 status. HMRC may only need to show one of these four aspects of control is present for there to be a strong case that the contractor is controlled and therefore inside IR35.
What is MOO?
There is a Mutuality of Obligation between an end-user client and contractor if the client is obliged to provide paid work and the contractor is obliged to accept and complete the work. This situation is typical of most employer-employee relationships, in which the employee is paid by their employer each week or month. Genuine limited company contractors outside IR35 should neither expect nor receive such mutuality of obligation. A contractor’s limited company should be engaged on contract for services basis, to perform a specific task for a specific project, and once the project is over the contractor moves on, or may be offered a new project by the client.
I’m a contractor; what happens if I get caught by IR35?
If HMRC choose to investigate, and deem you inside IR35 they will make their demand for the retrospective PAYE tax and National Insurance, plus interest and a possible penalty.
So what options do I have as a contractor?
- Consult your lawyer or accountant – We can put you in touch with suitable professionals if requested
- Review your current working practices
- If the majority of your work is deemed inside IR35, you may wish to consider joining an umbrella company
- Insure yourself