IR35 applies to all business sectors and specialisms and your status can vary from contract to contract, depending on the nature of the work and details of the contract. So what do you need to know?
What is IR35?
IR35 is a tax legislation created to fight tax avoidance by workers and contractors who supply their services to clients / hirers via an intermediary (such as a Limited Company), or via a Personal Services Company (PSC), who would otherwise be an employee.
HMRC refers to these workers as ‘disguised employees’, and should you be ‘inside IR35’ you are considered a permanent employee and will be taxed as such, either via an Umbrella company or through payroll.
If considered ‘outside IR35’ you are considered to be self-employed by HMRC, and will be entitled to structure your remuneration so as to benefit from the lower rates of tax, be entitled to claim expenses, and enjoy all the other positives of being self-employed.
Why is IR35 important to contractors?
IR35 ultimately affects the amount of your contractor salary you actually take home, so it’s extremely important!
Essentially if you’re contract is found ‘outside IR35’ then you’re able to split your income between salary and dividends, allowing you to keep your Tax and National Insurance contributions to a minimum. So effectively you’re able to achieve a higher take home pay than a full-time employee earning the same base pay.
If your contract is found ‘inside IR35’ and you’re considered a ‘deemed employee’ you’ll be expected to pay the same amount of Tax and National Insurance contributions as a full-time employee. Therefore your take-home pay would be considerably less than if your contract was found ‘outside IR35’, and most contractors are at pains to avoid working inside IR35 for these very reasons.
How is my IR35 position determined?
HMRC have set a number of rules which each and every one of your contracts must satisfy in order for their contract status to be deemed ‘outside IR35’ of the legislation. The rules relate to both the contract itself, plus your working practices once you’ve started the contract. These rules are designed to identify whether you’re working and behaving as you would if you were a permanent employee doing the same job.
HMRC use a combination of personal service/substitution, control and mutuality of obligation (MSC) to determine your IR35 status. We explore what these three things are in the next FAQ.
What is Personal Service/Substitution?
Personal Service / Substitution is one of the three key HMRC IR35 tests which make up MSC.
If your Limited Company has the right and is able to provide another contractor in your place to complete and deliver the services which the contract requests, then this would strongly indicate you are outside of IR35.
What is Control?
Control is one of the three key HMRC IR35 tests which make up MSC.
The level and amount of control which your client has over your working practices when completing the contract can impact your IR35 status. The more control you personally have over when, where and how you work, you’re less likely to be found ‘inside IR35’.
What is Mutuality of Obligation?
Mutuality of Obligation is one of the three key HMRC IR35 tests which make up MSC.
As a permanent employee you are obliged to be at work at certain times of the day and week, and your employer has an obligation to pay you even if the work dries up. If this sounds like your current contract, then you could be found ‘inside IR35’ as a greater level of obligation can imply that IR35 may apply.
Who decides if my contract is within IR35?
The decision at present completely depends on whether you’re working within the Public or Private sector. Take a look at the next few sections to see how your sector affects your status, and what major changes are on the way come April 2020.
How is IR35 decided in the Public sector?
Public sector businesses, such as the NHS, will need to have their end hirers determine the employment status of the contractors they engage. Once the contractor’s status has been decided, the hirer will need to inform the ‘fee payer’ (often the supplying agency) whether the contractor is to be paid net or gross of tax.
IR35 decisions should be made on a case-by-case basis, as mandated by HMRC. However, final decisions on IR35 statuses in the Public sector are more likely to be risk averse and many contractors remain wary of Public sector contracts for this very reason. Remember though! Public sector contracts don’t automatically mean you’ll found ‘inside IR35’, so they’re still worth considering if the contract is attractive.
IR35 in the Private sector (until April 2020)
At present, if you are considering a Private sector contract then it is your responsibility to determine your IR35 status. This also means you bear the tax implications if you get your status wrong. HMRC are active in carrying out IR35 investigations, so it’s worth enlisting the services of a specialist contractor accountant (such as Intouch) who understand IR35 inside and out, and can provide unlimited IR35 reviews to help you get it right.
If HMRC determine your contract is inside, then you will be considered ’employed’ and will have to pay more tax.
Be aware that all this is going to change come April 2020. To find out what those changes will be, take a look at the next FAQ: What changes are being made to IR35 in the Private sector from April 2020?
What changes are being made to IR35 in the Private sector from April 2020?
HMRC have decided to roll out the same rules for determining IR35 status as the Public sector, for the Private sector. So in short, from April 2020 every single contract IR35 status (regardless of which sector it belongs to) will be determined by the hirer (i.e. your client) and not you, with the associated tax risk also being transferred to the hirer.
The rules set out to determine your IR35 status will not change, so if you’re currently outside, then you should remain to be so post April 2020.
Specialist contractor accountants like Intouch who are dedicated to supporting the working practices of Limited Company contractors, are already actively engaging with end hirers and agencies to ensure the rules are applied correctly, and that the impact on contractors is minimal.
Should I refuse IR35 contracts?
This is a decision only you can make and the outcome will be based on a number of factors, for example how important the client is to you, how much your take-home pay will be, and if it could open more doors to bigger contracts in the future.
You could always try to negotiate the terms or the IR35 status itself or increasing your day rate to cover any additional tax payable, but failing that ask yourself if the money is a real deal breaker.
If my contract is inside IR35 should I use an Umbrella company?
If you decide to accept a contract which falls ‘inside IR35’ and on a PAYE basis, then one of the ways in which you’re able to do so is through an Umbrella company. An Umbrella effectively creates an overarching contract between yourself and your hirer. It deals with your tax, admin and payroll. When you get paid, your pay will go from your hirer to your Umbrella company, who will deduct your National Insurance, income tax and their processing fee, then they’ll pass onto you whatever is left. In a similar way in which you’d be paid as an employee in a permanent role.
IR35 is really nothing more than a different basis used to calculate tax when certain conditions apply. It’s no doubt that tax when found inside IR35 through your Limited Company is greater than when found outside, but it can still be less tax than if you were to use an Umbrella company. You’ll simply end up paying the tax and National Insurance contributions required based on your deemed salary (your Intouch accountant will be able to help you with this).
You may also find that there are clients out there who simply don’t want the risk of getting an IR35 status wrong and therefore having to foot the tax bill, and will therefore request you operate via an Umbrella, regardless of your contract. So if you find yourself making the move to Umbrella for one particular contract, be sure to enlist the services of a specialist contractor accountant such as Intouch, who are able to offer you both Limited and Umbrella services for different contracts.
What is my take home pay if my contract is inside IR35?
If your contract falls ‘inside IR35’ then a yearly calculation is made to determine the ‘deemed salary’, and your contractor accountant will be able to do this for you (so no guesswork on your behalf). An IR35 deemed salary is simply a calculation of the National Insurance and Income Tax due. You wont need to pay yourself the deemed salary, but will need to pay HMRC the calculated PAYE and National Insurance contributions.
If a Public sector body has determined your status as ‘inside IR35’ then it is the responsibility of the fee payer (usually the agency) to deduct the National Insurance and tax, then pay your Limited Company the net income post tax. You are then able to take this straight out of your company without any additional tax implications.
IR35 salary calculations follow the tax year (6th April to 5th April) rather than your company year. If found inside IR35 you’ll have the option to pay a small salary throughout the year, or ask your contractor accountant to estimate your deemed salary and pay a monthly salary in line with that. The benefit of doing so is that deemed taxes due are spread over the course of a year, therefore you’ll have a smaller balancing payment come April.
How do I stay IR35 safe?
IR35 investigations from HMRC can be extremely stressful, especially when the possibility of paying more tax could be a reality – so it’s important to get it right if you;’re working in the Private sector and the onus is on you to decide.
Whilst this is currently the case, come April 2020 your IR35 status decision will no longer be under your control. The main remaining issues will be whether those making the assessments have a full understanding and experience in making the correct decisions for contractors.
IR35 is a complicated piece of legislation which can have fairly serious consequences on your take-home pay if determined incorrectly. Make sure you’re with a specialist accountant like Intouch, who fully understands these impending changes and can advise you accordingly, based on your own personal circumstances. You need to know your accountant is there to support you no matter what, and to provide an unrivalled IR35 service at no extra cost to you. Sounds like something you need? It’s time to get in touch with us.
How can Intouch Accounting support me with my IR35 status?
IR35 2020 is just around the corner, and we’re here to help you and your hirer continue to work together compliantly and in a way that supports your working arrangements. All of our IR35 support services are free to clients and unlimited.
Our unique service is split into three distinctive areas, all designed with you in mind:
Clarity – unlimited IR35 contract and working practices reviews
As an Intouch client your dedicated personal Intouch accountant is able to give you unlimited IR35 contract and working practice reviews, with practical reports and advice to help you stay in control. Whilst the final decision is out of your hands come April 2020, we’ll provide you with advice on your contract and working practices in a format which can easily be used in discussion with your hirer. We’re also able to offer hirers legal support who are struggling to apply the ‘reasonable care’ that’s expected from them by HMRC.
Protection – switch between Limited and Umbrella with Freeflex
Contractors may find themselves needing the flexibility to swap between their Limited Company and an Umbrella solution, depending on their contract requirements – that’s where Freeflex comes in! Designed specifically by the team of expert accountants at Intouch, Freeflex gives you the safety net to switch between the two options at very short notice and with minimal disruption. Whilst you use Freeflex’s Umbrella solution (powered by Brookson), your Intouch accountant will keep your Limited Company’s daily tasks active, providing you with clear visibility of your finances in the Intouch portal. You’ll also still be able to speak to your dedicated Intouch accountant whenever you wish. When it’s time to switch back to your Limited Company, Freeflex will simply move you back over, where you’ll find everything up to date and ready waiting for you.
Support – IR35 specialist law firm support
Intouch are fully supported by our group company Brookson Legal – the only SRA-regulated law firm which focuses on IR35 for agencies and end hirers. They’ve been advising on IR35 since its introduction in 2000, and Brookson members sit on HMRC’s IR35 Forum.
Brookson Legal are well ahead of the IR35 game, and from advising Public sector clients since its introduction in April 2000 they already have an extensive list of existing relationships across the Private sector supply chain. Their support means we’re able to actively engage with agencies and end hirers to ensure the rules of IR35 are applied correctly, and the impact to contractors is mitigated.
If this sounds like the kind of unlimited and all-inclusive service you need from your contractor accountant, then get in touch.
where can I find more advice and support on IR35 from Intouch Accounting?
Simply visit our dedicated IR35 page, where you’ll find a free comprehensive guide on IR35 and advice and support on the services we offer our clients.