IR35 Explained For Start-ups and Contractors
Everything you need to know about IR35 as a Start-Up Businesses or if you are a Contractor discussed by Havenhursts Chartered Accountants
What is IR35?
IR35 is the name given to tax legislation in the Income Tax (Earnings and Pensions) Act 2003. It was legislation created by the government to reduce tax evasion amongst some workers or contractors. They were often referred to as disguised employees who were doing the same work as permanent employees would but as their own company to enable them to claim the same tax efficiencies of a business. It was originally introduced in 2000 to combat alleged tax avoidance and is intended to ensure that contractors who work as a permanent employee does pay broadly the same taxes.
In summary, IR35 refers to the United Kingdom’s anti-avoidance tax legislation relating to tax payments disguised by being a contractor who does a similar role and has some of the same benefits as an employed person but pays less tax.
When will the Private Sector IR35 changes take effect?
The changes to the IR35 legislation will be effective from April 2020 and are aimed at tackling ‘disguised employment’ which can benefit both the contractor and the end client business they are working for.
How can IR35 impact you?
A contractor who is outside of the IR35 legislation would be working as a separate entity from a business and would not be receiving the benefits that a permanent employee would receive. To compensate for the lack of job security and other benefits a limited company contractor who is working outside of IR35 is entitled to increased tax opportunities.
What and when will the changes to IR35 happen?
The new IR35 legislation is predicted to come into effect on 6th April 2020. The draft legislation was published in July 2019 to allow people who may be affected see the proposed changes. The new IR35 legislation is currently pending approval by the UK Government ( Parliamentary approval and Royal Assent).
The changes will apply to any payments made to you on or after 6th April 2020 and will also apply to any payments relating to work done prior to 6th April 2020.
Why is the IR35 legislation changing?
The changes are being introduced by HMRC to improve fairness in the tax system to ensure that contractors who are working for just one company in the Private are not able to ‘avoid employment taxes’ or National Insurance Contributions (NICs) by working in this way.
At the moment, Private-sector contractors are responsible for determining their own IR35 status, and are liable for any unpaid tax and NICs if they get it wrong. The end client has no involvement in their tax payments except to offer advice or refer them to an IR35 expert.
From April 2020, unless they count as a small company, the end client will be responsible for determining the status of the contractors they use.
HMRC state, IR35 itself is not changing and contractors who are genuinely outside before the reform will still be outside after it. The main difference being; the end client, not the contractor has to assess and specify the correct status.
What factors are relevant in the IR35 changes?
HMRC will use a number of criteria to determine if your contract falls inside or outside IR35, in summary:
- Are you under the supervision and control of the client?
- Are you able to provide a substitute if needed?
- Is there a mutuality of obligation and do you incur financial risk?
- Are you part of the end-client’s organisation?
- Do you receive any employee benefits?
There are also other factors to consider:
- Use of company equipment
- Absence procedures
- Contractual termination rights or the continuity of your assignment
A professional accountancy business like Hayvenhursts Chartered Accountants has extensive experience of IR35 and will be able to provide you with guidance and support if, and how the changes will affect you.
Right of Control – Supervision and Control of the Client
When you are employed by a business the business dictates what has to be done, how it is done, how frequently and when. If, as a contractor the above applies to you then you will not be deemed to be self-employed but employed.
If the business can move or change the tasks or location of a contractor according to their priorities then they will not be deemed to be self-employed but employed.
If the business can exercise significant control over how their duties are performed through supervision, monitoring, checking and appraisals rather than autonomy to complete a task or project, then they will not be deemed to be employed rather than self-employed. Contractors will generally work freely, whereas permanent employees are managed.
Right of Substitution
If there is a need for one specific person to carry out the duties and tasks of a role then this is an essential element of a contract of employment. If a contractor can choose whether to perform their duties and tasks themselves or hire another person to do them on a reasonably unrestrained and uncontrolled basis then can be deemed as being self-employed.
Whilst having the right to send a substitute is a strong indication that a contractor may be outside of IR35, having a substitution clause in a contract is rarely enough. The contractor must have the ability and not just the theoretical right to send a substitute for it to have any effect on their IR35 status. The right to substitution alone may not be enough if other factors indicate that the IR35 status is inside and employed.
Mutuality of Obligation & Financial Risk
The expectation of a business to provide regular and continuous work to a contractor to be completed in the time and way that the business wants them to is deemed as an employed relationship.
Any clauses in a contract which sets out a business’s obligation to offer and provide further work which the contractor has to accept, would be a mutuality of obligation and would be deemed as an employed basis by IR35 legislation. Rolling contracts’ or contracts that are continually renewed could also be included in the IR35 legislation.
Workers that are permanently employed by a company will very rarely be taking a financial risk to be at work. Being a separate entity means that contractors may have to purchase their own equipment, which depending on the length and rate of the contract in question could leave you out of pocket.
Typically, permanent employees will have a notice period, but as a contractor, an end-client will normally have the option to terminate a contractor’s contract immediately if they need to.
As a rule of thumb, any contract which strikes similarities to a permanent employee the contractor is likely to be deemed ‘inside’ IR35.
Employee Benefits
As a contractor, you are not entitled to employee benefits such as training courses, holiday and sick pay, annual staff parties and pension contributions and if you receive any of these then it is deemed you are an employed, inside status.
What does inside or outside ir35 mean?
Inside and Outside IR35 indicate your IR35 status; being a genuine contractor (outside) or an employee for tax purposes (inside). The terms reflect whether you are operating within the legislation’s scope.
What happens if my assignment status is inside IR35?
If the end-client determines that you are inside IR35 then you are classed as ‘employed’ for tax purposes. In this situation, there are two options:
- You will have to work through an approved umbrella company who will invoice the end client, deduct PAYE tax and National Insurance (NI) from your pay rate and make an ‘employment payment’ to you. The umbrella company will normally charge a fee for these services.
- The end client (as the fee payer) will deduct PAYE tax and National Insurance (NI) from your contract rate, before paying you, your Limited company.
What happens if my assignment status is outside IR35?
If the end client determines you are outside IR35 then you can continue working and paying yourself as a limited company. If you are deemed as employed by the iR35 legislation then you will be liable for full tax and National Insurance contributions, in the same manner, a permanent employee would, as opposed to a salary and dividend structure if you are outside. You will also need to calculate a deemed payment (your annual turnover minus your 5% allowance for the running costs of your company).
What happens if I already work through an umbrella company?
An umbrella company is a separate company who act as an employer for contractors who work on fixed-term contracts. The umbrella company invoice the business for the contractors work and they pay the contractors minus PAYE tax and National Insurance (NI), along with their umbrella fees. In this situation, the new IR35 legislation rules do not target contractors who are employed by an umbrella company.
Umbrella companies do not negate the IR35 legislation and are only compliant’ in the sense that they tax their employees in the standard way. All umbrella companies have to tax their employees (contractors) in exactly the same way as any other employee and can only compete and make profit from the fees they charge to their clients.
Who is responsible if the incorrect IR35 status is decided, the business or the contractor?
The business providing the work is responsible for the determination of IR35 status and, as long as the contractor hasn’t provided them with any fraudulent information on which they based their assessment then they are not liable should the assessment be incorrect.
What happens if I disagree with the IR35 determination?
If you feel the end client/business status decision either inside or outside of the IR35 legislation is incorrect then you can challenge it and they will have to respond to a request for a status determination within 45 days. The end-client can either justify their decision or give a new status determination which sets aside their previous determination. There is no appeal process if the end-client decides to stick to their determination but they are responsible if the status is incorrect and doesn’t follow the rules and guidelines set out in the legislation.
What other factors contribute to HMRC IR35 decision?
The regulations if your contract status falls inside or outside IR35 are extremely complex and will depend on the contract in question and working practices. HMRC will review everything to establish if you are an ‘employee – inside’ or a ‘contractor – outside’ so it is always best to seek advice from an IR35 expert like Hayvenhursts Chartered Accountants.
If you are an End Client or a Contractor then a professional review by an IR35 specialist is highly recommended to ensure the status determined is accurate and within the legislation, as it is extremely complex and there are many factors which determine if a contractor status is inside or outside of IR35.
About Hayvenhursts Chartered Accountants
Whether you are a new business looking for an accountant for the first time, a contractor or an established business looking for more from your accountant then we can provide you with the best accountancy services in the UK. We believe in developing an understanding of your start-up or existing business, its needs and goals so we can offer you the personal services of a local accountant who has the infrastructure, knowledge and expertise in a large national accountancy practice.
Choosing an accountant is an important decision and you should always find one that matches yours and your businesses needs and one that you trust and feel comfortable with.
Hayvenhursts are IR35 Specialists and will work with you and in-depth as a start-up business, contractor or end client to assess where you sit within the legislation and what you need to do to ensure you are compliant.
We can give you advice and trustworthy information about your business’s financial records and statuses. We can be involved in financial reporting, taxation, auditing, forensic accounting, corporate finance, business recovery and insolvency. We can support you with accounting systems and processes and will work alongside you to drive your business forward, bringing our skills of strategic forecasting along with expertise in finance, accountancy, auditing and taxation which is essential to every business in today’s climate, whether new or existing.
Our services are available whenever you need them and you can call us whenever you need help and advice without being charged every time.
Our range of services are extensive and will help you establish your IR35 status as well as anything else that goes along with running and managing the financials of a business. We will spend time with you to learn and understand your business and adapt our services to suit you. Our services include:
- Contractors and IR35
- Accounts Preparation
- Audits
- Bank Accounts
- Book-keeping
- Book-keeping Health Check
- Business Growth
- Business Health Check
- Business Plans
- Business Valuations
- Commercial Property
- Company Formation
- Company Secretarial
- Inheritance Tax Planning
- Management Accounts & Information
- Management Systems
- PAYE Health check
- Payroll & PAYE Returns
- Personal Tax
- Property Tax
- Raising Finance
- Reduce your SRA Audit Costs
- Registered Office
- Strategic Planning
- Tax Disputes
- Tax Enquiries & investigations
- Tax Planning
- Tax Returns & Self-Assessment
- Trusts
- VAT Health check
- VAT Planning & Disputes
- VAT Registration
- VAT Returns
If you need to know about IR35 Legislation as a Start-up Businesses, as a Contractor or an End Client contact us today on 02920 777 756 and we will answer any questions you may have, or we can arrange for one of our expert and knowledgeable accountants to call you or come out and see you at a time convenient to you.