A background to IR35 and off-payroll working rules
Working self-employed through an intermediary or Personal Service Company (PSC), such as a limited company or limited liability partnership, and taking income through a combination of salary and dividends, allows contractors to pay lower rates of National Insurance Contributions (NICs) and income tax compared to regular employees.
However, HMRC deemed that too many individuals were taking advantage of this tax loophole and avoiding paying the correct amount of tax and NICs. HMRC believed that many of these individuals would have been employees if they provided their services directly to the client and, therefore, should be paying the same income tax and NICs as employees.
Therefore, IR35 was introduced in April 2000 to identify contractors who avoided paying the appropriate tax by providing their services through an intermediary and were working as ‘disguised employees’. The legislation also sought to unearth businesses engaging workers on a self-employed basis to ‘disguise’ their actual employment status.
HMRC reformed the off-payroll working rules for the public sector in April 2017. The introduction of the legislation shifted the responsibility for determining the employment status from the individual working through the intermediary to the public sector client engaging them. The off-payroll reform also made the fee-payer responsible for accounting for and paying income tax and NICs to HMRC on behalf of the worker. The fee-payer is the party paying the worker’s intermediary for the worker’s services – usually, the worker’s end client or the recruitment agency.
The off-payroll working rules came into effect for the private sector from April 2021. From this point, all public authorities and medium and large-sized clients in the private sector are responsible for deciding the worker’s employment status and whether the rules apply. Like the public sector, the fee-payer is responsible for accounting for and paying income tax and NICs to HMRC.
How is your IR35 status determined?
Following IR35 changes introduced by HMRC for the private sector in April 2021, the responsibility for determining the IR35 status of the contractors they engage lies with the end client. The rules apply to work in the public and private sectors. The end client must provide a Status Determination Statement (SDS) to all parties in the labour chain, explaining the status determination.
The only exception to the off-payroll working rules is if your private sector end client is based entirely overseas, with no UK presence, or if you’re working for a private sector client that meets the criteria for the small business exemption.
Determining whether a contract is inside or outside IR35 is complex. Your IR35 status is determined by several factors, including, but not limited to, control, substitution, and mutuality of obligation. We’ll explain these further:
- Control – What degree of control does your end client have over when, how and where you complete the work laid out in your contract?
- Substitution – Can you, or are you required to, send someone to complete the work in your place?
- Mutuality of obligation – Is your client obliged to offer you work, and are you obliged to accept it?
Outside IR35
Outside IR35 means that it has been determined (following a status determination) that a contractor is engaged on a self-employed basis. They are working truly independently and not in a manner akin to a permanent employee.
Inside IR35
If you are inside IR35, it means that the terms of your engagement are similar to a permanent employee. Being inside IR35 will mean that you will be paying tax similarly to an employee of your client. The fee payer (the entity that makes payment to your limited company) will be required to deduct PAYE tax and NICs at source before making a net payment for the work completed. If you are inside IR35, there are no tax benefits of working through a limited company, and most end-hirers and recruitment agencies will require you to use an umbrella company – if you’re happy to take the assignment and be paid in this way (PAYE).
What is a Status Determination Statement (SDS)?
A Status Determination Statement (SDS) is a legal requirement, and it is the end client’s responsibility to decide the employment status of every worker who operates through an intermediary, even if provided through a recruitment agency. Before producing an SDS, your end client will conduct an IR35 assessment to determine whether the engagement is genuinely self-employed or if the relationship with the company is more akin to that of an employee. Your end client will then provide a written SDS outlining your employment status and why the engagement has been determined as inside or outside IR35.
Does an IR35 status determination apply to all my contracts?
The answer is no. An IR35 status determination is applied on a contract-by-contract basis. Your status may differ depending on the contract agreed with your end client. This means it is possible to take on contracts that are inside and outside IR35.
What is the Small Business Exemption?
Under the private sector off-payroll legislation, small companies are classified via the same criteria used in the Companies Act 2006. The Act defines the following parameters for a small company to operate within:
- An annual turnover of up to £10.2 million.
- A balance sheet total of no more than £5.1 million.
- No more than 50 employees.
To qualify for the small business exemption, your end client must meet two or more of the conditions listed above. If your private sector end client qualifies for the small business exemption, the original Intermediaries Legislation applies. It then becomes your responsibility as a contractor to determine your IR35 status and tax yourself accordingly.
Umbrella companies and IR35
Due to off-payroll legislation, there are few benefits to continuing to contract through a limited company for assignments deemed inside IR35. If your contract falls inside IR35, working through an umbrella company offers a compliant and efficient way of getting paid PAYE. PAYE, or Pay As You Earn, is HMRC’s tax system to ensure workers’ pay the correct amount of tax and National Insurance Contributions.
When you join an umbrella company, they will become your employer and ensure that you are paid a salary in line with the terms of your contract with your client or recruitment agency. The umbrella company will also make the necessary income tax and NIC deductions and pay them to HMRC on your behalf. Most compliant umbrella companies do not have a tie-in period, so you can use their payroll service when you need it for contracts inside IR35.
Contact us today for information about our services
At Fusion Business Services, we provide a leading contractor accountancy service which is popular amongst contractors who are working on outside IR35 assignments. If you interested in finding out more about our contractor accountancy services? Please schedule a free consultation, and one of our expert consultants will be in touch to discuss your options. Alternatively, please call us on 0800 2294020.
