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"IR35" is the name commonly used to refer to a piece of tax legislation which came into force in July 2000. It determines for tax purposes whether a contractor is a disguised employee of their client. If a contractor acts and is treated like an employee, then IR35 may apply.
IR35 is relevant to contractors who operate their own limited companies or partnerships and pay themselves dividends. If you provide a personal service to a client and are regarded as an employee of the client, you will fall inside the scope of IR35 and you will need to consider the implications of this. It’s important for a determination to be made as to whether you fall inside or outside IR35 at the start of every contract and at regular intervals during the contract.
You do not need to worry about IR35 if:
The decision as to whether a contractor is working inside or outside IR35 lies with the end client if they are a medium or large sized company. They will need to make a Status Determination Statement (SDS) Which sets out whether you fall inside or outside IR35.
The end client is required to take reasonable care when issuing an SDS. The party paying the contractor's limited company (the fee payer) is responsible for deducting and remitting any employment taxes due and paying the net amount to your company. It must also pay employer's NICs and the Apprenticeship Levy.
On 6th April 2013, IR35 was extended to 'office-holders'. Where a contractor fulfils the duties of an office, the income from those services is subject to PAYE/NICs as employment income. Simply put, a contractor will not be able to operate outside IR35 when acting as an office-holder of the client.
In April 2017, a new chapter of IR35 was introduced that affected contractors working in the public sector. Public sector clients are responsible for determining whether IR35 applies and where a contractor works within the scope of IR35, the public authority, agency or third party paying the limited company ("fee payer") is responsible for deducting tax and NICs from those payments. It must also pay employer’s NICs and the Apprenticeship Levy.
In April 2021, the off-payroll working rules that were introduced into the public sector in April 2017 were extended to the private sector. This meant that the responsibility for determining a contractor's IR35 status moved from the contractor to the end client (where the end client is a medium or large sized company). The person paying the limited company (the fee-payer) is responsible for deducting the necessary tax, if IR35 applies. There were some other changes to the legislation, with the main ones being:
If you are inside IR35, you should pay employed levels of tax and NI. If you are outside IR35, and working as a director of a limited company, you may choose to pay yourself using a combination of salary and dividends. Whether you are inside or outside IR35 is the most pressing question. Unfortunately, it is often the most difficult to answer. In essence, you are inside IR35 if you act and are treated like one of the client’s employees. You are outside IR35 if you are genuinely in business on your own account. In practice, things are more complex than that and it is easy to get it wrong – sometimes with serious consequences.
HMRC has an online tool to give you some guidance on your IR35 status. It is called the “Check Employment Status for Tax” (CEST) tool and HMRC guidance can also help you determine whether or not you fall within IR35. However, it is not as easy as you might think.
If your company provides services to a small sized end-client, you remain responsible for determining your IR35 status. To do this, you may find it beneficial to take advice from an expert. You should take advice at the start of your assignment, and at regular intervals during this assignment. Our specialist IR35 Team is on hand to provide practical and clear IR35 advice that's completely tailored to you and your circumstances.
You can ask an adviser, such as PayStream, to review your contract. But, you should not be misled in to thinking that this will automatically secure your status as being outside IR35. HMRC will make its own judgement about the relationship between you and the client and in doing so, will establish how you work in reality. It’s important therefore that your adviser also reviews your working practices. This is something that PayStream can help with too.
If you provide services to a medium or large sized client, the fee-payer is responsible for deducting the necessary tax and NICs and will pay the net amount to your company.
The simple answer is that you will pay tax and NICs as if you were an employee if you are within IR35.
If you have been working through your own limited company (PSC) via an agency, you can continue to do so but the agency will deduct tax and NICs and will pay the net amount to your PSC. These fall under what are known as ‘deemed’ arrangements and you should take further advice if this applies to you.
It is standard HMRC policy to carry out enquiries and no one can guarantee they will not be investigated.
IR35 enquiries tend to stem from standard PAYE or VAT enquiries. You should keep your accounting records in order and ensure that your taxes are paid and up to date.
If you are definitely within IR35, things are simpler. Many contractors opt to use an umbrella company such as My Max from PayStream. As an employee of our company, we will deduct all necessary taxes and provides you with employment rights.
IR35 investigations usually started by HMRC when they believe that someone who is claiming the status of being a self-employed contractor, working through an intermediary (like a limited company) should actually be taxed as an employee.
Investigations are often started as a result of HMRC’s compliance checks with large organisations who engage significant numbers of off-payroll workers. They may look in depth at groups of workers and make enquiries of individuals to determine whether, in their view, they are disguised employees.
When you use an umbrella like My Max, you become an employee of the umbrella company. Compliant umbrella companies will deduct employed levels of PAYE and NICs from your gross salary and pay them to HMRC on your behalf, just like any other company that directly employs you. That means you don’t have to worry about IR35.
Infographic: What helps and hinders IR35Launch infographic
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