IR35 can be a minefield for Limited Company contractors, especially when it’s laden with technical accounting jargon that’s tough to understand. That’s why the expert accounting team here at Intouch have created a handy IR35 glossary of terms, to help cut through the noise and leave the key facts every contractor should know. No accounting talk or hard-to-understand explanations, just straightforward examples and evidence to help make the complicated simple.
Check employment status for tax (CEST) tool – HMRC developed their online CEST tool as a way of helping contractors work out their IR35 status for tax purposes (so either employed or self-employed). Whilst it’s a quick way to test your status, it’s been found not be 100% reliable, as some contractors have been found ‘inside IR35’ when really they were ‘outside’.
Contractor – Contractors work for themselves and choose how, when and where they work, and can accept contracts based on their own personal preferences. A contractor is someone who is typically employed by their own Limited Company.
Control – Control is one of the three elements that make up HMRC’s IR35 test – MSC (Mutuality of Obligation, Personal Service/Substitution and Control). The amount and level of control your client has over your working practices when completing your contract can impact your overall IR35 status. The more control you have as a contractor over when, where and how you work, you’ll be less likely to be found ‘inside IR35’.
Deemed employment payment – A deemed employment payment (DEP) refers to ensuring relevant income that’s classed as employment income, is accounted for.
For example, if you’re contracting within the Private sector and your contract is found ‘inside IR35’, you will need your accountant to calculate your DEP. DEP is accounted for once a 5% expenses allowance has been deducted along with any other allowable costs (for example company pension contributions).
DEP should be submitted to HMRC within the same tax year in which you receive the relevant income. Be aware that you’ll most likely also need to submit your tax return at the end of the year.
DEP is due to change in April 2020, when the Private sector IR35 reform takes place. Be sure to speak to your contractor accountant to ensure you’re aware of DEP and how it could affect you.
Disguised employee – A disguised employee is someone who works through an intermediary (such as a Limited Company) and claims to be self-employed, but reaps all the benefits of a permanent employee. Their working practices closely resemble those of an employee. IR35 was designed to seek disguised employees out and to ensure they pay the correct amount of tax due.
End client – The end client or end-hirer is the company or person who you as a contractor provide work to.
Fee payer – The fee payer is either the end-client or agency for a particular contract who pays the intermediary (your Limited Company). If your contract is Public sector, or Private post April 2020, your PAYE tax and NI deductions are also the responsibility of the fee payer.
Inside IR35 – Being found ‘inside IR35’ means either your contract or working practices (or both), mirror those of a permanent employee, and you should be taxed as such (via either an Umbrella company or through payroll). Whilst you’ll be taxed in the same way as a permanent employee, you won’t receive the same benefits, such as holiday or sick pay. There are steps you can take to ensure your IR35 status is determined correctly. Enlisting the services of an expert contractor accountant who specialises in IR35 (such as Intouch Accounting) is one way to do this.
Limited Company – A Limited Company is a separate legal entity in its own right, and is a popular way in which contractors conduct their business.
Being Limited means you’re able to pay yourself via a combination of salary and dividends. As both payments carry different taxation levels you’re able to retain more of what you earn whilst the tax man still gets what he’s entitled to. You have control over when you draw money from your Limited Company and you’ll have greater flexibility in the way in which you plan your finances or invest money which remains within your company’s account.
Not sure if Limited is for you? Download our free guide: Venturing into Contracting to find out more about the world of contracting.
Mutuality of Obligation (MoO) – Mutuality of Obligation is one of the three ways which make up HMRC’s IR35 test – MSC (Mutuality of Obligation, Personal Service/Substitution and Control).
MoO – this relates to the extent you are obliged to carry out any work offered to you or whether the client is obliged to offer you work outside the scope of the contract. Where those obligations are limited entirely to the work set out in the contract this is suggestive that IR35 will not apply.
National Insurance Contributions (NICs) – All person’s aged 16 or over working in the UK either as employees earning over £166 per week / £8,632 per year must pay National Insurance Contributions (NICs). Paying NICs means you’re entitled to benefits such as Maternity Allowance and Basic State Pension.
Off-payroll working through an intermediary – If you’re a contractor working through your Limited Company, then you’re off-payroll working through an intermediary. It’s why IR35 legislation applies to determine a contractor’s true status, and as such how they should be taxed.
Outside IR35 – As a Limited Company contractor, should your contract be found ‘outside IR35’ then you’re able to split your income between dividends and salary, allowing you to keep your Tax and National Insurance Contributions to a minimum. So you’re generally able to achieve a greater take home pay than that of a full-time employee earning the equivalent base pay.
Pay As You Earn (PAYE) – PAYE is a way of paying your income tax to HMRC. Working under PAYE means your employer pays your tax contribution directly to the government, and takes this amount from your salary.
Personal Service Company (PSC) – A Personal Service Company (PSC) is a term used by HMRC to describe kind of business that a Limited Company is, so they can ensure the correct tax deductions are made on your income. Being classed as a PSC doesn’t affect IR35, and the same rules apply. Speak to your Personal Accountant if you are unsure as to whether you are a PSC and how you’re affected.
Private sector – The Private sector refers to contracts from within industry and commercial firms.
Public sector – The Public sector refers to contracts from within public services in the UK. These can range from healthcare such as the NHS, to education and general services.
Recruitment Agencies – A recruitment agency is a popular option in aiding contractors with finding their next contract. Many contractors team up with recruitment agencies as it can take away the stress and strain of finding contracts on your own. They’re able to connect you with clients, and advise you on negotiating terms and rates.
Substitute – A substitute is another contractor who you’re able to substitute in your place during a contract, should for whatever reason you’re unable to work for a period of time. Using a substitute is a major consideration when assessing your IR35 status.
Working practices – Working practices relates to your day-to-day working pattern and activity, and the relationships you have with your end client.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.