What does being inside IR35 mean for your contractors?
When determining a contractor’s employment status, the outcome will be either inside or outside IR35. If a contractor is deemed to be inside IR35 it means they are not operating compliantly with the Intermediaries legislation and are therefore not entitled to the preferential tax treatment afforded to limited company contractors.
If a contractor is deemed to be inside IR35, he is what HMRC would call a “disguised employee” of the client’s workforce and should therefore pay income tax and National Insurance Contributions (NICs) as if he was employed.
So how is a contractor deemed to be inside IR35?
In the Autumn 2018 Government budget it was announced that the much-anticipated private sector IR35 changes will take effect from April 2020. These changes will largely mimic the changes which came into effect in the public sector in April 2017. The changes mean that the obligation and associated risk of determining a contractor’s IR35 status will shift away from the contractor and onto the end hirer. Up until April 2020, the responsibility will remain with the contractor, so it is really important that all parties understand the obligations and exercise reasonable care in determining the employment status of the contractor.
Regardless of who is determining the contractor’s IR35 status, the same principles and indicators will apply. When assessing the employment status of an individual, the contract and working practices will be considered.
As discussed in more detail in other blogs, the three main IR35 indicators are whether the end hirer exercises any supervision, direction or control over the contractor, whether there is any mutuality of obligation present and whether there is a valid right of substitution. There are other subsequent factors which should also be considered such as financial risk, integration, provision of equipment and the parties intentions.
What is the impact of a contractor operating inside IR35?
As highlighted above, come April 2020 the client will bear the responsibility of determining a contractor’s IR35 status. This also means that they will be responsible for ensuring the correct amount of tax and NIC is accounted for. Where an engagement is deemed inside IR35, the taxes should be accounted for on a PAYE basis, the same as employees, as opposed to the preferential dividend usually associated with a limited company.
Where a contractor is working outside IR35, the most tax efficient way of operating is by taking a mixture of director’s fees and dividends. However, when a contractor is regarded a disguised employee (and therefore inside IR35), the contractor must pay tax and national insurance similar to an employee and as a result cannot benefit from the national insurance savings associated with drawing dividends.
Does that mean a contractor will always remain inside IR35?
A contractor’s IR35 status is determined on an assignment by assignment basis. As such, whilst one assignment may be caught by IR35, that is not to say future assignments will not be compliant and therefore fall outside of the legislation. If future assignments were structured to ensure the contractor is treated as a genuinely self-employed, independent contractor, who’s limited company is engaged to provide services on a specific project, which is not subject to the client’s control and an element of financial risk can be demonstrated, it is possible to work in an IR35 compliant manner.
What can be done to help determine the IR35 status of a contractor?
Seek expert advice and assistance.
Brookson Legal Services are on hand to help contractors, agencies and hirers accurately assess employment status. Brookson Legal Services have been providing IR35 advice since its inception in 2000; it has members who have sat on the HMRC IR35 forum and we are an SRA regulated law firm. These factors make Brookson Legal Service’s offering unique within the industry and can assist agencies and clients with the daunting task ahead by providing:
- Bespoke education and training on IR35 and the changes to the rules
- Audits of existing flexible workforces
- Advice on policies and procedures to manage the new rules compliantly
- Periodic audits to ensure ongoing compliance and exercise of “reasonable care”
- A dedicated helpline to assess with queries