IR35 is back.
After much debate and some effort to postpone it further, off-payroll working rules are officially approved to take effect with the Finance Act 2020.
Originally planned for April 2020, but postponed for 12 months during Covid-19, the rules will now take effect in April 2021.
What is IR35?
IR35 is a tax anti-avoidance rule designed to prevent disguised employees from avoiding employment taxes by getting into contracting relationship with employers.
In this context, a contractor is a person providing their services to a client, through their company or an intermediary, who works under such conditions that of an employee, and they actually could be hired directly as an employee.
In case the relationship between the contractor and the client does not meet the definition of an employee, IR35 will not apply as they are a genuine contractor.
Why is IR35 applied to contractors?
Compared to being directly employed by an employer, contracting has particular tax advantages. It allows the contractor to manage taxes under a company by self salary payments, dividend payments, deducting some expenses from taxable income. Falling under IR35, the contractor will pay the PAYE and NIC, which are higher than the tax payments made by the contractor. Employers have advantages for not paying employer’s part of NIC and being free from other liabilities about employee rights and benefits.
What are the requirements coming with off-payroll working rules?
IR35 has been in effect since 2000; the contractors must self-assess their tax status and apply the right treatment; which was not really enforceable according to HMRC.
The new off-payroll working rules are moving the responsibility to determine whether a contractor falls into IR35’s scope and should be taxed as an employee, over to the employer (the client of the contract).
If a contract payment is accepted as direct deemed payment (such as a payment to an employee), the client will be responsible to account for all the taxes and NIC, and losses and penalties in case of a wrong application. The payment made to the contractor will be treated as net salary payment, taxes and NIC will be added over to the sum to reach the gross salary amount. Employer’s part of NIC will also be paid over gross salary.
This presents further complications as the employers can make decisions against contractors and reflect tax costs in their fees only to be on the safe side, or as was the case in the last few years, they can make a decision not to hire such contractors at all and force contractors, regardless of their status, to be employees.
How is IR35 applied to contractors?
To determine whether a party is a genuine contractor or a disguised employee, HMRC introduced an online tool, Check Employment Status for Tax, which is the first step to determine the status (employee or contractor) of a worker. The tool aims for employers and workers to discover whether their relationship must be considered as direct employment under IR35 by answering questions under seven headings.
These, in essence, testing the contractual relationship in four key areas.
- Mutuality of obligation
Does the contractor have to accept work? Is the client obliged to provide it?
To accept a contractual relationship as genuine, the parties must have a level of independence in making decisions. If the contract sets mutual obligations between client and contractor such as client is supposed to ask the work, and the contractor has to perform, then an employment relationship exists.
- Substitution
Is the contractor allowed to send a substitute in their place? Does the client have the right to reject a substitute?
A substitution points to a genuine contract to perform the work rather than employing a specific person for the position.
- Supervision and control
Does the client have the right to move the contractor from the task they originally agreed to do? Does the client have the right to decide how the work is done? Does the client have the right to decide the contractor’s working hours? Does the client have the right to decide where the contractor does the work?
The control of the client over the contractor must differ from the employment relationship in a way that the client must not mandate particulars other than that are necessary to perform the work.
- Part and parcel
Will the client provide the contractor with paid-for corporate benefits? Will the contractor have any management responsibilities for the client organisation? How would the contractor introduce themselves to the client’s consumers or suppliers?
If the contractor’s role is designed to be part of the client company structure, this is more likely to be an employment relationship.
Other questions the tool seeks answers to are on the worker’s duties, financial risk the worker takes over by the contract and other factors such as if the worker has similar contracts with other clients. The tool evaluates the answers to make a judgment on the status of a worker, whether they are a genuine contractor or disguised employee.
And it can conclude with an ‘Unable to make a determination’ statement.
Then there is a more comprehensive Employment Status Manual to work on, which at the end calls for judgement from parties.
After the new rules take effect, the debate over this will likely to go on for some time.
See a sample of questions from the tool for determining IR35 status
A sample of questions from the tool for determining IR35 status
(different answers lead to different questions in the tool)
Check Employment Status for Tax
1. About you and the work
What do you want to find out?
If the off-payroll working rules (IR35) apply to a contract
Who are you?
Worker, hirer or agency
What do you want to do?
Make a new determination
Does the worker provide their services through a limited company, partnership or unincorporated association?
Yes
Has the worker already started working for the client’s organisation?
No
2. Worker’s duties
Will the worker be an ‘Office Holder’?
3. Substitutes and helpers
Does the client have the right to reject a substitute?
4. Working arrangements
Does the client have the right to move the worker from the task the worker originally agreed to do?
Does the client have the right to decide how the work is done?
Does the client have the right to decide the worker’s working hours?
Does the client have the right to decide where the worker does the work?
5. Worker’s financial risk
Will the worker have to buy equipment before the client pays them?
Will the worker have to fund any vehicle costs before the client pays them?
Will the worker have to buy materials before the client pays them?
Will the worker have to fund any other costs before the client pays them?
How will the worker be paid for this work?
If the client was not happy with the worker’s work, would the worker have to put it right?
6. Worker’s involvement
Will the client provide the worker with paid-for corporate benefits?
Will the worker have any management responsibilities for the client?
How would the worker introduce themselves to the client’s consumers or suppliers?
7. Worker’s contracts
Does this contract stop the worker from doing similar work for other clients?
Is the worker required to ask permission to work for other clients?
Are there any ownership rights relating to this contract?
Has the worker had a previous contract with this client?
Will this contract start immediately after the previous one ended?
Will this work take up the majority of the worker’s available working time?
Has the worker done any self-employed work of a similar nature for other clients in the last 12 months?
Back to Off-Payroll Working Rules (IR35)