What is IR35?
“IR35” is the name commonly used to refer to a piece of tax legislation which came into force in July 2000. It looks at whether a contractor is working any differently from an employee of the client. There should be noticeable differences between how contractors and employees work, otherwise IR35 may apply to the contractor.
Does IR35 apply to me?
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 you to determine whether you fall inside or outside IR35 at the start of every contract.
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.
You do not need to worry about IR35 if:
- You pay employed levels of PAYE and National Insurance Contributions (NICs) whether as an employee (for example, of an umbrella company) or as an agency worker being paid directly by the agency on PAYE.
- You are self-employed i.e. working as an individual with full liability for any debts you may incur. Please note that in these circumstances, you will need to consider whether you are genuinely self–employed.
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 is included for calculating the Apprenticeship Levy. In April 2020, this is being extended to the private sector.
What does it mean to be “inside” or “outside” IR35?
If you are inside IR35, you should pay employed levels of tax. 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 have released on 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. There have been a couple of high-profile enquiries, such as the Dragonfly Consulting case and the Island Consultants case where contractors believed they were outside IR35 but were found by HMRC to be within it.
How can I make sure my contract assists me in falling outside IR35?
You can ask an adviser, such as PayStream, to review your contract. But, you should not be misled in thinking 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.
How can I make sure I’m not investigated?
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. To keep your profile with HMRC low, you should keep your accounting records in order and your taxes 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 still help you to maximise your take-home pay.
How do umbrella companies help with IR35?
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.
What does an umbrella company do?
The umbrella company will employ you allowing you to build up continuous employment with one company while you work on a number of temporary assignments. This is handy, for example, when making mortgage applications. An umbrella company will also process your allowable business expenses. Where possible, you should always get receipts for your expenses and send to the umbrella company as requested, or retain safely at home for 6 years.
There were major changes to the expenses rules in April 2016 such that there can be no reimbursement of ‘commute’ expenses for workers subject to (or the right of) supervision, direction or control in the way they carry out their work. Furthermore, expenses (other than mileage) cannot be reimbursed under flexible “salary sacrifice” arrangements.
If an umbrella company claims that it can reduce your income tax or NICs, or let you claim more expenses than other companies, walk away. Income tax, NICs and allowable expenses are set by HMRC and no company has the power to alter these. If a company “allows” you to claim for extra expenses, you will still have to prove to HMRC, in the event of an enquiry, that the expenses were genuine.
Will a limited company reduce my tax bill?
If you are genuinely running your own business, forming a limited company and operating outside IR35 is more tax-efficient because you can receive some of your income in the form of dividends. Your IR35 status does however need to be reviewed carefully. If you provide services to the public sector, your end client will decide on your IR35 status. If you are working in the private sector, this responsibility still lies with you and if you are subsequently found to be inside IR35, this could prove very costly. You will have to repay the tax you would have paid as an employee, interest and in some case, penalties. You should take professional advice before taking this step.