What is Inside IR35?
The Intermediaries Legislation or IR35 got introduced and executed in April 2000 by HMRC. The main aim of IR35 rules is to eliminate the tax benefits of offering services via a limited firm by individuals who aren’t in business on their accounts.
At the time when IR35 got introduced, each worker was accountable to assess their IR35 status. Due to this reason, the employment agency or limited company of the worker was accountable to pay any National Insurance Contributions due or tax.
The rules target so-called ‘disguised employees’ whose working practices are similar to that of conventional employees. It is anti-avoidance tax legislation that is made to tax “disguised employment” at a rate the same as regular employment.
There are a few key principles to determine IR35 status:
Determining whether IR35 applies to an assignment is a complex exrcise. To do this, an organization needs to assess the degree of supervision, control, and direction that an end client has over what, when, where, and how independent contractors complete the daily basis work or contract work.
If the contract with the end client is a “contract of service”, in place of a “contract for services”, then it falls inside the IR35 scope. If there is an obligation of personal service, then IR35 is most likely applicable. Independent contractors who fall within IR35 contracts are considered to be ‘deemed employees’ of the end client.
As a result, any tax benefits from a services contract will get lost, as the independent contractors will be regarded as “subject to PAYE”. A ‘deemed payment’ will have to be made to HMRC." When the contractor is “inside IR35”, then a ‘deemed payment’ is required to be made to HMRC after the end of the tax year.
To know how to stay outside IR35, an independent contractor needs to conduct a precise assessment and review of their current contract profile using the assistance of an expert professional. It will help them implement the necessary procedures to save them from paying financial penalties and additional contributions in the form of tax, NIC contributions, etc.
Independent contractors need to assess themselves on the three IR35 test principles i.e., mutuality of obligation, substitution, and control. The three principles work for both public sector as well as private sector companies. It is important to ensure that these conditions do not apply to the working practices and contract to prevent getting impacted by IR35.
With Transformify’s freelance management system, companies can now ensure compliance with IR35 rules and avoid duplicate payments, and messy invoicing. The HR software seamlessly integrates with the ERP, time tracking, accounting, and other software solutions that are used by the business client.
What is Outside IR35?
To be regarded as “operating outside IR35”, a contractor has to work as a genuine contracted business to the client operating in the private sector, in place of working as an employee. Legitimately self-employed contractors would fall outside IR35 in most cases.
They work on the legit “Contract for Services” that makes sure that their working practices adhere to the HMRC guidelines. An independent contractor that is outside IR35 is 'genuinely' self-employed, works on defined projects, actively advertises the services of the business, and works for more than one client.
How do I know whether I’m inside IR35?
IR35 criteria to determine whether a business ( a limited company) or a self-employed individual is “inside the Intermediary legislation” are to establish the following:
How much control does the independent contractor have over the work, contractor’s work timing, and workplace restrictions?
Whether or not the contractor can send a substitute to complete the work
Whether there is a compulsory commitment for the recruiting company to provide work to the contractor
How integrated is the worker into the business?
Whether the worker has any key financial obligations such as purchasing their equipment, software licenses, etc.
How do I know whether I’m outside IR35?
Checking the IR 35 status on check employment status by HMRC helps in determining whether or not the contractor falls within or outside the intermediary legislation.
To use the tool, any business or contractor would require the following:
Who decides what job needs doing?
Who decides where, when, and how the job is done?
How the contractor gets paid
If the engagement comprises any reimbursement for expenses or corporate benefits
To be outside IR35, a contract profile should show that his working practices as well as the client's actual working practices. It should show the details of the services that a contractor provides, and where and when he will be working.
If a contractor offers services, in place of a contract for a service, and could send a substitute in his place for job completion, then he is most likely to fall outside of IR35.
There are a few other assessments that would help in determining and confirming that a contract falls outside the Intermediary legislation.
If the client isn’t obliged to provide any further work and there is no compulsion to accept further work, then such contractors fall outside the Intermediary legislation.
Furthermore, if the contractor has the right to work for multiple clients simultaneously, then also they would not come under the scope of IR 35.
If the contractor uses his equipment and not the one that is provided by the client, then this also indicates a sign of being self-employed/outside criteria of IR35.
If the contractor doesn’t have access to staff facilities, and an obligation to attend social events and staff meetings, then they do not come under the IR35 rule.
HMRC presented the off-payroll working rules in 2000 to distinguish between the employees that fall within IR35 and outside IR 35. In the former case, the worker is liable to pay for National Insurance Contributions and income tax just like the other employees of the company.
There is not much time left for the IR35 rule to come into force. This makes it essential for businesses to have enough preparation to deal with this regulation. Review the complete hiring process to make it clear whether the contract role is within or outside of IR35.
There has to be a process so that every interview and application is supported by a clear discussion about the role of IR35 status. The decision should be made whether to replace their contract staff with the permanent one or recruit an alternative worker who can work within IR35 law.
It is also possible for a professional worker to have a combination of contracts that fall within and outside of IR35. In such a case, a contractor has to be organized and seek professional advice. One such expert in this field is Transformify. The HR software provider offers a Freelance Management System to help businesses fully automate billing and payouts to 184 countries ensuring that both independent contractors and their employers are in compliance with the applicable legislation across the globe.
This article does not constitute legal or tax advice.