What is happening and when?
What: The Government is extending the off-payroll rules, which have applied in the public sector since 2017, into the private sector. The rules will apply to all work done by contractors working through a personal service company (your own limited company).
There are tests for determining IR35 status and these are not changing, but the responsibility for making the status decision and the related deductions are.
When: The extended rules will apply from 6th April 2021, to all work done on or after this date.
What is the difference? From 6th April 2021, the client – not you (the contractor), will be responsible for assessing IR35 status.
As you provide your personal services to an end-client through a limited company, your relationship with the end-client shouldn’t be an employer/employee relationship.
So, why is this so important to you? Well, if HMRC or the client deems you to be working as an employee, rather than a contractor, the amount you pay in tax differs. HMRC want to make sure the tax you pay reflects your employment status. These rules are enforced by HMRC through legislation that is commonly known as IR35.
IR35 can be complicated, and often, information you can find online and even HMRC’s own guidance can be confusing. It is an important piece of legislation, so we have tried to explain it in a way that will hopefully help you to understand if you’re paying tax correctly.
A very brief history
IR35 was introduced to address the problem of people working through personal service companies to avoid paying employment taxes.
Through a limited company, you can split any Income Tax and National Insurance Contributions due, between a low salary and high dividends – thereby securing a higher take-home pay than an employee.
From April 2020, if IR35 applies to your contract, it means you will have to pay the same Income Tax and National Insurance Contributions as you would if employed directly rather than contracted to work through your limited company.
The financial impact of IR35 can be significant.
IR35 regulations are there to determine if the relationship between you (as the worker) and the end-client would be employer/employee relationship, if we, the agency and/or your limited company wasn’t in place.
Breaking it down: IR35 determines if you’re an employee of the client or whether your limited company is providing services to that client.
Here are a couple of terms you’ll need to know:
Personal Service Company (PSC)
A company that sells the work or services of an individual (or group of individuals) that is owned and operated by that individual (or group of individuals).
The entity that sits between the end-client and the worker, such as Abatec (the agency) or limited company.
The end-client must decide based on the working practices of the contract, on the employment status of the person doing the work. This is called a Status Determination. The determination will be either “inside IR35” or “outside IR35”.
Am I an employee or a contractor?
You may think that because you have a limited company and the work isn’t permanent, you’re therefore a contractor.
Well, unfortunately, it is no longer that simple, and there’s a variety of questions you should ask to establish your employment status.
It’s important to remember that IR35 is designed to cover many scenarios. There is no single situation to prove IR35 rules apply or not. What is important is that the contract between your limited company and the agency or end-client, and the actual working practices you follow, mean you should not be regarded as an employee of the end-client you are providing services to.
HMRC are becoming increasingly tough with regards to IR35 enforcement.
In the public sector, they introduced changes in 2017 that put the responsibility on the end client to determine the IR35 status of people providing services via limited companies. This led to an increase in the number of contracts deemed to be “inside IR35” in the Public Sector and an increase in the amount of employment tax paid to HMRC.
This makes it even more important to evidence that you’re not an employee of your end-client and that you are working legitimately as a contractor through your limited company. The first thing to consider when approaching IR35 is whether your work is controlled and directed by you, or if you are subject to an employer/employee relationship.
How do you know if IR35 rules apply to your contract?
Determining whether IR35 applies or not is complex and must be considered at the individual contract level.
HMRC will also look ‘behind’ the contract at the actual working practices being followed – so it’s not just a ‘paper exercise’.
If you are not sure seek advice; talk to us and/or your client. However, there are some key principals you should consider to help determine your status.
It is important to remember that this is not a ‘tick box’ exercise. None of these principals alone will determine your status one way, or the other.
What degree of control does your client have over what, how, when and where you complete the work?
As a contractor, it’s likely that you’ll work to a comprehensive job specification
This specification would outline:
•The services to be provided;
•Where the services are provided;
•The hours in each day over which the services are provided.
However, the contract may go further and say that you must submit to management guidance, appraisal or monitoring.
This is an indicator your work is being controlled and that you are treated as an employee, not a contractor.
Are you required to carry out the work yourself, or can you send someone else in your place?
If you have to provide your services personally, this is usually an indicator that you’re an employee.
A contractor, on the other hand, could send a substitute to complete the work on their behalf.
A contractor could also reassign the work.
However, the right to send a substitute must be absolute and not restricted to such an extent that you have to perform the work yourself.
How integrated are you in the employee workforce?
This is where HMRC will look to see if you (the contractor) have become so integrated into the end-client’s business, that it would be arguable that you played an integral part in that business.
This could include things like having your own desk and dedicated IT provisions (including a company email address), unrestricted access to the end-client’s premises, being allowed to join pension schemes or even invitations to paid staff functions like a Christmas party.
As a contractor working outside IR35, you should be an ‘accessory’ to the business but not an integral part of it.
Some other factors to consider:
Financial records: A contractor will receive payment when work is completed, while an employee will usually be paid at regular intervals.
Alternative work: If you’re contractually obliged to have one client at a time, you’re probably an employee, not a contractor.
What if I don’t agree with the status determination?
As you can see, the rules are complex, but if you disagree the with status determination, you should immediately seek professional advice. Ideally, this should be before you start working on the contract. The professional adviser should be impartial and use their experience in this field to make a recommendation so you know where you stand.
If you are already working on a contract where you dispute the status determination, you should present your opinion to the end-client. The client must then set up a ‘client-led status disagreement process’ to resolve the issue. The client has 45 days to respond.
If the end-client doesn’t change their view on the status determination, and you want to pursue the issue further, you will need to contact HMRC and ask them to review the decision. You should seek professional advice and be aware that this could be a long process which may involve giving evidence at a Tribunal.
IR35 is a complex issue. If you need further advice, or are unsure, please let us know and we will do our utmost to help, or at the very minimum, guide you to the right place for answers.
Published January 2021. The information contained within this document is correct at time of writing. It is provided as general background information and should not be taken as legal or financial advice.