IR35 is another name for the off-payroll working rules. HMRC introduced IR35 when it discovered a growing trend of individuals providing employment services through personal service companies (PSCs), primarily to avoid PAYE and National Insurance.
IR35 rules will apply in situations where the worker would be treated as an employee of the contractor, if the personal service company did not exist. HMRC says that when working out whether IR35 applies to a contract or engagement, “you must work out the employment status of the person providing their services.”
What does it mean to be inside the IR35?
According to HMRC, you must pay income tax and National Insurance Contributions just like employees if your services reflect employment rather than self-employment.
What does outside the IR35 mean?
When you’re outside the scope, HMRC sees you as self-employed and you’re able to pay yourself in a tax-efficient way. Your contract must reflect the way you and your client work, as well as the services that you will be providing, when and where you will work. If you offer services, rather than a contract for a service, then you’re likely to fall outside of IR35 as you could send someone to do the work in your place, for example.
There are multiple factors to consider if effectively self-employed:
- No Control – For a contract to fall outside IR35, contractors should have freedom over how they complete their work.
- No Mutuality of Obligations – This is an important clause in a contract, as it’s a key test when working out self-employed status. If the client is obliged to offer work (and pay you) and you’re obliged to take it, this demonstrates a contract of employment.
- Right of Substitute – For a contract to fall outside IR35, you should be able to send a substitute to complete the work instead.
- Insurance – Contractors should have a comprehensive business insurance policy.
- Provision of own Equipment.
Income from only one company over a considerable period could be challenged by HMRC as employment income, falling under the IR35 rules.
How do I know if my business is inside or outside the scope?
Every medium/large business is responsible for setting the tax status of its contractors. If this tax status is not confirmed, you will be responsible for any fees and penalties.
IR35 is taken on a case-by-case basis by HMRC, and it can be assessed at any time. Other factors are considered, but HMRC advice is to consider all factors that are present.
HMRC have a tool available to check your employment status for tax here.
Ensure that your answers are honest and clear to ensure your status is accurate, should you ever need to defend yourself to HMRC. It is always best practice to do regular reviews of your contracts and agreements to ensure you fall outside IR35.
Still need some advice?
It’s always worth chatting with an expert before making any decisions over your IR35 position, so if you need some guidance, contact our team today.