Initially planned for 2020 but postponed due to the coronavirus pandemic, the changes to IR35 went ahead in April 2021. With this change, medium to large organisations have a responsibility for ensuring their self-employed contractors are just that – self-employed. It is a complex process, with the purpose of ensuring individuals are paying the right amount of tax.
Why was IR35 introduced?
Contractors had previously been responsible for determining their IR35 status. It was estimated by HMRC that contractors avoided paying £1.3 billion in taxes every year, as they were setting their status as outside IR35. It could be down to a lack of understanding, or it could also be deliberate, but in any case, the rules have changed and HMRC are cracking down on contractors who are working as disguised employees.
Inside or Outside IR35?When a role falls “outside IR35”, this means that the contractor can work as a viable self-employed contractor and thus taxed as such. If the role is deemed to be “inside IR35” then the contractor is being deemed as an employee for this role (IR35 status is determined for each role you take on). If the role is inside IR35, then the contractor must be properly taxed with all PAYE tax and NI contributions made to HMRC.
How to Determine IR35 Status
There are four main factors that should be looked at to determine IR35 status.
1. If the contractor has complete control over how they work, when and where, they are most likely to be outside IR35. However, if the business is determining when and how a contractor works; for instance, they have set hours, lunch times and are told to work at a set location, they could be deemed as an employee, and risk being categorised as inside IR35. This is also known as Supervision, Direction and Control (SDC) and for outside IR35 roles, there must be no (or very little) SDC from the client.
2. Another factor is whether the contractor can be substituted. If the assignment is not specific to the person, then they are more likely to be outside IR35. If the client requires a specific person to do the job and would not allow any substitutions, then this will likely make the assignment inside IR35.
3. If there is mutuality of obligation, i.e., the business must provide work and the contractor must accept it, the contractor is more likely to be inside IR35. When providing a true self-employed service, there should be no obligations from the client to provide more work once the contract is ended.
4. The fourth factor (and sometimes considered as the most important) is financial risk and remedial fixes. If there are no financial risks towards the contractor, then the role will likely be deemed as inside IR35. A financial risk could be anything from making sure you have Professional indemnity insurance for your Ltd company, to agreeing to remedial fixes, i.e., fixing any mistakes you make at no extra cost to the client. The more financial risks there are towards the contractor, the more likely the role will be deemed as outside IR35.
Although the above are the biggest and most important factors for determining the IR35 status of a role, there are other factors too that will point towards and inside IR35 role. Such as:
• Being an Office Holder for the client
• Receiving company/employee benefits from the client
• Having access to the client’s HR department
• Joining client staff members on company organised events and training sessions
The Consequences of IR35 Regulations
There has been quite a number of high-profile people being stung by these new regulations. One of which is the sports TV presenter, Gary Lineker, who may be liable for a tax payment of almost £1 million. Gary worked under his own company while contracted by BBC and BT Sport. However, HMRC believe that he was working as an employee, and not a contractor. Eamonn Holmes, the TV presenter, was another celebrity targeted by HMRC. After over 20 years’ working as a freelancer, HMRC determined that he may be sitting inside IR35.
Understanding Your Status
It is crucial for contractors to keep themselves right when it comes to IR35. For instance, ensuring that they are working flexibly, and not tied to a specific schedule determined by the business. A contractor should be able to come and go as they please, and deliver based on milestones, rather than set hours. Taking on multiple contracts at the same time also helps determining an outside IR35 status. This is not guaranteed; however, it does help your case if you ever wish to make an appeal against a client’s decision. Just remember to keep evidence of anything that helps determine you as a true self-employed contractor.
If you have any inclination that you may be working more as an employee than a contractor, you should speak to someone within the business to make immediate changes to working practices where possible.
If you are looking for your next project as a contractor, you can drop us an email at info@my-cos.net, and we will advise on any opportunities we currently have.
