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IR35

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?

How is an IR35 case decided?

HMRC have a set of rules to determine if you are working inside or outside of the IR35 legislation. The rules relate to the way you work as well as the actual contract details, so you will need to consider IR35 for every new contract you undertake. The rules aim to identify whether you are actually working and behaving as you would if you were permanently employed doing the same job.

The basic rules are easy to understand, yet applying those rules and determining employment status can be far more complex. A specialist contractor accountant such as Intouch will be able to advise on a case by case basis, but the basic rules are based around the following areas:

• Personal service/substitution

If your company has the right to provide someone other than yourself to deliver the services that it is contracted to provide, then this would strongly indicate that you are operating outside of IR35.

• Control

The level of control that your client has a right to exercise over your working practices impacts on whether you will be inside or outside of IR35. If you are in charge of when and where, but most importantly how you work, you are less likely to fall within IR35.

• Mutuality of obligation

As an employee you are obliged to go to work at certain times and days of the week, and there is an obligation to pay you, even if the work dries up. If this describes you, then you could be ‘deemed employed’. A higher level of obligation implies that IR35 might apply.

Understanding iR35 can be complex, but as a contractor it’s crucial you understand how it affects you. Take a look at our infographic to grasp the basics, or download our comprehensive IR35 guide for more detail.

How Intouch can help

Here at Intouch our award-winning contractor accounting service includes unlimited IR35 contract reviews, advice, risk assessments and fee protection – giving you everything you need to contract confidently, knowing your IR35 status is in safe hands.

Got a new contract? Simply pass it over to your Personal Accountant and they’ll provide you with a detailed IR35 status report, highlighting any possible areas for concern.

We are the IR35 industry experts, so get in touch today.

How will I know if my contract is within IR35?

IR35 in the Private Sector

If your contract is with a Private Sector client then it is your responsibility to determine your status under IR35 and you bear the tax risk if you get it wrong. If you have determined that your contract is outside of IR35 but the authorities decide that you are ‘deemed employed’, there will be more tax to pay, and potentially other penalties as well. The extra tax can be charged retrospectively, potentially for as long as the engagement took place, even if that means several years. This is why it is useful for you to take professional advice to determine your status.

Working with a specialist contractor accountant offering unlimited IR35 reviews included in their fee really pays off. The scary stories of contractors closing their companies because of IR35 usually occur where the contractor has ignored IR35 for some time and is faced with a large bill from HMRC. All of this can be avoided by having an IR35 review early in the assignment and continuing to have regular reviews to ensure things have not changed.

IR35 in the Public Sector

When working in the Public Sector, the end client is responsible for assessing your IR35 status, and bears the tax risk if they get it wrong. Some public sector bodies initially imposed blanket bans on Limited Company contractors, insisting on Umbrellas for everyone. Thankfully, the majority of these have since been relaxed, with IR35 decisions now being carried out on a case-by-case basis (as mandated by HMRC). However, decisions on IR35 are still more likely to be risk averse and some contractors remain wary of Public Sector assignments for this reason.

So it’s important to remember that although some contractors remain wary of Public Sector assignments, they don’t mean you’ll automatically be working inside IR35.

Here at Intouch Accounting unlimited IR35 reviews come as standard in our monthly service fee. Get in touch to find more today.

What is the MSC legislation?

Managed Service Companies (MSC) were developed out of attempts to avoid the IR35 rules. There are many different types of MSC and HMRC have found it difficult to draft legislation to catch all of the variations. Even where HMRC are able to successfully argue that IR35 should apply and additional taxation liabilities arise, many MSC have no assets from which the additional tax can be paid or they are deliberately wound up.

Recovery of PAYE and NIC from specified persons

Consequently HMRC introduced far reaching, and quite scary legislation allowing the recovery of unpaid PAYE and NIC to be sought from ‘specified persons’ if recovery of the tax cannot be obtained from the MSC.

The list of ‘specified persons’ is drawn very widely and can include directors of the MSC, the intermediaries who formed the MSC, or those who were deemed to have encouraged the individuals to use the MSC route for the provision of their services, being personally liable.

What are the IR35 rules?

The following factors are used by HMRC when they assess your IR35 position:

Control

Does the level of control in the relationship support freedom for the contractor to operate independently and determine exactly what, where, when and in what order tasks are completed? Does the contractor devise their own methods and processes?

Substitution

Where the contractor has the ability or right to substitute himself with the services of another, there is a strong presumption of being self-employed. Equipment

A genuinely self-employed contractor is more likely to provide his own equipment than to have it provided by the client.

Mutuality of Obligation

In contractor terms there’s a test to establish whether the arrangements establish future mutual obligations. If no future obligation exists for the client to provide further work and if the contractor can choose to accept or reject work (if offered) there would appear to be no mutual obligations.

Financial Risk

If jobs overrun but fees are fixed, then financial risk rests with the contractor. If they also bear the risks of providing equipment and incurring overheads such as insurance, they are also exposed to financial risk. Both are indicators of being outside the scope of the IR35 rules.

Basis of Payment

Contractors have to raise invoices for payment and may be able to charge interest with respect to payments made late.

Working practices and Benefits

Acting as or being treated similar to members of staff is a factor in HMRC’s assessment. Use of canteens, staff car parks, using expenses reclaim forms, being paid for sickness or holiday, all indicate employment. An absence of these items indicates self-employment.

IR35 can sometimes be a confusing world, that’s why we’ve created this easy-to-understand guide. Download for free today and be clear on where you stand with IR35.

How Intouch can help

Here at Intouch our award-winning contractor accounting service includes unlimited IR35 contract reviews, advice, risk assessments and fee protection – giving you everything you need to contract confidently, knowing your IR35 status is in safe hands. Got a new contract? Simply pass it over to your Personal Accountant and they’ll provide you with a detailed IR35 status report, highlighting any possible areas for concern. We are the IR35 industry experts, so get in touch today.

What is the effect of being taxed under IR35 on deemed salary?

If at the end of the tax year (5th April), the total salary and benefits paid to you from your company under normal PAYE, are less than 95% of the total income earned under that contract, then the remaining balance (less some allowable expenses) is called ‘deemed salary’ and taxed as if it had been paid as salary.

This deemed salary will usually mean corporation tax is nil. There are occasions where there will be corporation tax to pay and therefore a small dividend that can be paid, but only in the case where the expenses aren’t covered within the 5% as mentioned above.

This is assumed that the contract is deemed as being caught by IR35, when a client is within the private sector. Rules are different for contracts caught within the public sector. Changes to the private sector will be rolled out on 1 April 2020 as announced in the 2018 budget.

How does IR35 affect self employment and personal service companies?

Contractors who are self-employed are not affected by IR35 legislation, although they could be subject to a review of employment status.

In order to benefit from the tax advantages of using a personal service company then it’s necessary to fall outside the scope of IR35. If based on the facts you fall inside the scope of IR35, you’ll be taxed according to its provisions.

How does IR35 affect Umbrella companies?

For individuals under employment contracts or contractors using Umbrella arrangements (where they are taxed under PAYE), IR35 legislation does not apply. No taxation advantage is being sought, so no risks of challenge arise.

If you’re on the look-out for an Umbrella company that pays you directly via PAYE and takes care of all the necessary tax and NI calculations and payments on your behalf, then get in touch with Brookson Umbrella solution. Their hassle-free solution means they get on with keeping the tax man happy, leaving you free to do what you do best.

What do you need to be IR35 safe?

Talk to a specialist adviser such as Intouch Accounting about how you deliver your services as a contractor; get them to review and comment upon your contract for free. Make sure you follow our ‘tips’ on how to demonstrate that you’re genuinely in business on your own account. Keep full and proper records, claim all expenses you’re legally entitled to claim, and enjoy being your own boss!

We are the IR35 industry experts, so get in touch today.

Can I insure myself against any costs or taxes?

Yes, insurance is available against any historical tax liability assessed at a future point on a contractor who originally paid tax as if he were outside of IR35 and is subsequently determined to be inside its scope and has to pay tax on a ‘deemed salary’. You can also insure against professional fees in defending these challenges.

How do I get this right from the beginning?

Speak to a specialist adviser. Make yourself aware of the risks and pitfalls and get some ‘top tips’ in setting up your business properly. Take care with the structure and ensure you behave in accordance with the business practices and working conditions that support your independent status.

How Intouch can help

Here at Intouch our award-winning contractor accounting service includes unlimited IR35 contract reviews, advice, risk assessments and fee protection – giving you everything you need to contract confidently, knowing your IR35 status is in safe hands. Got a new contract? Simply pass it over to your Personal Accountant and they’ll provide you with a detailed IR35 status report, highlighting any possible areas for concern. We are the IR35 industry experts, so get in touch today.

What happens if I thought I was outside IR35 but was wrong?

As a Limited Company, contractors generally adopt the position that they are outside of IR35 and operate as independently as possible. They consider their contract and working conditions and take full, legitimate advantage of the tax benefits and other flexibilities. If HMRC challenges this stance the contractor has the following choices: (1) To agree with the taxman, with hindsight, and pay the taxes and interest due. (2) To disagree with the taxman and argue the case via advisers or in person.

If the taxman wins the argument he will raise tax bills that treat all your income from contracting as if you were permanently employed throughout (back to square one). If tax has been paid late there could also be an interest charge and some professional fees to sort it all out. It’s OK to be wrong and have a different opinion to the taxman. However, the cost of being wrong can be expensive, so get specialist advice and IR35 reviews early on, and periodically thereafter.