Tax Advice

IR35 – Everything you need to know

by admin

Jan 2, 2021

In this week’s blog we will recap what IR35 is and outline the key changes that have occurred most recently and what this could mean for you.


What is IR35?

The government describes IR35 as “off-payroll working rules for clients, workers (contractors) and their intermediaries”. So what does that mean? IR35 specifically looks at contractual workers, who work through an intermediary, to offer and provide services to an end business. However, they would normally be deemed as a full-time employee if they did not work through an intermediary.

A contractual worker is defined as an independent contractor/worker (or 1099 employee based on the tax form they receive), who enters a contractual agreement with a business in order to provide a service exchange for a fee. This relates to two main groups: independent contractors (those that are self-employed providing a service through a limited company or other business) and freelancers (providing a service on an ‘as required’ basis to a business).

HMRC identify these types of workers as “disguised employees” as they may be awarded the same rights and benefits of an employee, whilst paying a reduced level of tax, through their current set up.


Does IR35 apply to me?

Understanding whether IR35 applies to you, comes down to how you are treated and behave within a business. There are core factors that HMRC use in order to determine whether IR35 applies or not:

1. Substitution 

The contractor or end business is able to send a substitute to complete works in the contractors place. This would mean the contractor is not supplying a personal service and therefore the worker isn’t a “disguised” employee.

2. Control 

The end business controls the workload of the contractor or how the work is carried out. This would suggest the person is inside IR35 as they are not providing a specialist service.

3. Mutuality of obligation (MOO)

If both the contractor and end business pass the above two factors, it is unlikely that MOO applies.

4. Risk

The contractor can make a profit or loss – this would suggest that the contractor is outside of IR35.

Questions to ask yourself:

  • Do you generally have control over what, how, when and where you complete work?
  • Do you have to complete the work yourself or can someone work in your place?
  • Is your client obliged to offer you work and are you obliged to complete it?
  • Are you taking a financial risk by doing or not doing the work?
  • Are you an essential part of your client’s organisation?
  • Does your client provide the equipment you work  with ?
  • Do you receive benefits like sick pay, holidays or bonuses?

If you are a permanent employee of a business, receiving a salary and making National Insurance and tax payments under PAYE, IR35 does not apply to you. Similarly, if you are a temporary employee providing services directly to a business or via an  agency, IR35 does not apply.

There are free tools available to help you understand whether IR35 applies to you, however we would strongly advise speaking to your accountant in the first instance.


Private Sector Changes

When IR35 was initially introduced, the responsibility for assessing IR35 was with the contractor, meaning the contractor or employment agency was responsible for paying any tax or National Insurance contributions due.

For the public sector, this changed in 2017, shifting the responsibility to the public sector body engaging with the contractor. Therefore meaning that the body engaging with the contractor became responsible for ensuring the correct IR35 status was defined. At the time, the private sector did not change to mirror the changes that the public sector faced, however now, as of the 6th April 2021, a change impacting the private sector will come into play. The responsibility for determining a contractor’s IR35 status and paying relevant tax will be passed to the companies engaging them. This therefore means that the engaging company will be held liable should HMRC decide that the status is incorrectly assessed.

NOTE: The test for assessing an employment status is not changing, only the liability for ensuring compliance that will be different under the new rules. 

This change within the private sector does exclude “small businesses” from this, therefore meaning that contractors working for them will continue to determine their own IR35 status for tax purposes.

Here is a summary of the key changes coming into effect on the 6th April:

  • The end hirer or “engaging” business is responsible for the IR35 assessment
  • The intermediary business between the contractor and the end hire are liable in the first instance for the payment of the unpaid taxes
  • The end hirer is responsible for deciding whether the contractor is inside or outside of IR35
  • The end hirer will have to issue a “Status Determination Statement” to the intermediary and contractor

What should I do if I am affected by IR35?

If you believe that you are impacted by IR35 and it is applicable to you, you should seek guidance from your accountant to understand what your tax and NI penalties are likely to be. Your accountant will be able to help you understand how to conduct an IR35 assessment, along with the  tax and NI consequences.  interest you are likely to owe.

Aspreys are available to assist all parties involved in IR35 so please feel free to reach out if you have questions:
[email protected]