HMRC and IR35
HMRC introduced IR35 (or the ‘off-payroll working rules’) in 2000 to tackle what it calls ‘disguised’ employment.
Some contractors (and their hirers) might try to take advantage of the tax efficiency of working through a limited company, when in practice the contractor is essentially working as an employee.
The benefit for employers hiring workers in this way is that they don’t have to pay employers’ National Insurance contributions or give contractors employee benefits. The benefit for contractors is tax efficiency.
So, IR35 assesses whether contractors are for all intents and purposes employees when they take on work for clients.
If you’re a contractor who’s ‘inside IR35,’ HMRC sees you as an employee and you face an income tax and National Insurance burden, just as employees do. You don’t face this if you’re ‘outside IR35.’
Many find the legislation complicated to understand. Even HMRC seems to struggle – its record on successfully fighting IR35 cases at tribunal is patchy.
This lack of clarity, along with ambiguity over employment status guidelines (including the available employment rights if contractors are found inside IR35), has proven controversial since the law’s introduction.
IR35 rules for limited companies
When does IR35 apply?
HMRC says that when determining whether IR35 applies to a contract or engagement, “you must work out the employment status of the person providing their services.”
HMRC goes on to say that the off-payroll rules apply if the contractor “would be an employee if there was no intermediary”. The intermediary in many cases is the contractor’s limited company (often called a personal service company)
Intermediary meaning: what is an intermediary?
IR35 is also known as the ‘intermediaries legislation’ because it applies to workers who provide their services through an intermediary, rather than working as an employee.
As mentioned, the intermediary will often be the contractor’s own limited company, or personal service company.
A personal service company is a limited company where the sole director, the contractor, owns most or all of the shares. The contractor then delivers services to clients.
But gov.uk says that there can be other intermediaries: a partnership another personal service company an individual
A contractor can provide their services directly to clients through their intermediary, or they might work with an agency.
What does IR35 status depend on?
IR35 status depends on some key tests you can use to work out whether you’re an employee for tax purposes – these tests usually relate to supervision, direction and control. We go into more detail as part of our IR35 checklist below.
HMRC also has a tool you can use to check whether IR35 applies to a contract (CEST, or the ‘check employment status for tax’ tool), plus an IR35 helpline.
In reality, IR35 status hinges on IR35 case law and employment legislation, itself reliant on decades worth of employment tests heard in the UK courts.
Another problem is that HMRC’s CEST tool may not be entirely accurate as it doesn’t take a key piece of case law (mutuality of obligation, or MOO) into account.
IR35’s nuances mean that contractors can’t be expected to know the law inside out. You should only use this article as a guide. If you’re unsure about anything please seek advice from an IR35 expert – there are many professionals out there who offer contract review services.
Public sector and private sector IR35 rules
There are currently different rules for public sector and private sector contracts.
for public sector contracts – the hirer is responsible for working out whether the contractor falls inside or outside of IR35. If they fall inside, the hirer, agency or other third party who pays the contractor then needs to deduct tax and NICs and report them to HMRC
for private sector contracts – the contractor is responsible for working out whether they fall inside or outside of IR35. If they’re inside, they need to pay the tax and NICs due
IR35 changes in the private sector in April 2021
Private sector IR35 reform is set for April 2021, when the public sector rules will be applied to the private sector.
This was meant to happen in April 2020, but it’s been delayed by a year.
The upcoming IR35 changes mean that:
medium-sized and large businesses will be responsible for working out the contractor’s employment status, not the contractor
contractors should given the reasons behind the decision, and can dispute the decision if they disagree with it
small businesses are exempt from the changes – so if the contractor works for a small client, the contractor will still be responsible for working out their employment status
End clients are classed as small businesses if they meet two of the following criteria: annual turnover of no more than £10.2 million balance sheet total of no more than £5.1 million no more than 50 employees
Businesses and contractors should start preparing for the 2021 IR35 changes as soon as possible.