What is IR35? (Off-Payroll Working)

Friday April 2, 2021 at 2:35pm

What is IR35 and How Does it Affect Contractors?

IR35 is a common name for HMRC’s off-payroll working rules. Essentially the rules exist to target ‘disguised employment’, which is where a contractor is functioning as an employee in all but name. The off-payroll working rules can apply if a contractor provides their services through an intermediary, typically their own ‘personal service company’, and are paying less tax because of it.

What is IR35?

The goal of IR35 is to ensure that intermediary workers that are functioning as employees, pay a similar amount of tax and National Insurance contributions as a regular employee would.

Why is IR35 Relevant Now?

As it currently stands if you are working as a contractor, through your own personal service company, for a public-sector company then they are responsible for deciding your employment status and therefore whether the IR35 rules apply to you. If you are contracting for a private-sector company then you (the personal service company) determine whether the rules apply.

However, from April 6th additional rules will come into place surrounding IR35 and one of the major changes is that most private-sector companies will become responsible for determining if a contract falls inside IR35. If you disagree with the decision then you should make sure you are prepared to dispute it, otherwise you will have to pay significantly more tax.

What factors determine IR35 Status?

This is a complex topic as the laws have been built over years of employment case law, but there are some common factors that are used to determine IR35 Status. The major factors are listed below, if you think you may be affected it is worth considering each of these.

  1. Control – Does the client have the right to determine your working hours, location, how you carry out your work and whether you can take on alternative work? If yes, then this indicates that the you are functioning as an employee rather than as a contractor.
  2. Personal Service / Substitution – If the client insists that you complete the work yourself and you are not able to send someone else in your place, then you have no right of substitution. This will likely mean your contract lies within IR35 and the off-payroll working rules will apply.
  3. Mutual Obligation – If you expect your client to provide you with additional work after a contract and you are expected to accept it, then you are mutually obligated. Additionally if a contract states that you must work a certain number of hours a week and the required work isn’t specified upfront then the contract will likely fall inside IR35.
  4. To avoid this, a contractor should take on work in the form of projects and only commit to work until their projects are complete.
  5. Equipment – For the most part, a contractor should use their own equipment where possible as this shows independence from their client, though there is no issue if they are required to use a client’s equipment for safety or security reasons. For contractors that primarily use CAD software then in most cases they should own a license rather than rely on using a client’s license.
  6. "For contractors that primarily use CAD software then in most cases they should own a license rather than rely on using a client’s license."

  7. Part and Parcel – Another consideration is how integrated a contractor is within a client’s company. If a contractor appears in organisational lists, has additional responsibilities or are in charge of other staff, then they are functioning like an employee and IR35 will apply.
  8. Employee benefits – Benefits such as pension contributions, sick leave, health plans and holiday allowances are typical for employees rather than contractors and should not feature in any contract that lies outside of IR35.
  9. Financial Risk – Regular, salary-like payments may cause a contract to fail IR35. Contractors should ideally instead invoice after completing key stages in a project. If the client requires regular invoices then they should state the hours worked, the rate charged and the work completed.

What to do next?

The list of factors above is not comprehensive but hopefully it provides an idea of whether or not you may be affected by IR35. If you suspect that you may be affected, then it is worth reviewing any factor that may cause you to be determined to be a ‘disguised employee’ and consider getting legal advice from a qualified expert about your contracts.

If you are deemed to fall into the IR35 status and require your own hardware or 3D CAD licence, there are a number of options available to you. Speak to one of our experts today to discuss your requirements and choose the solution right for you.

More information can be found at https://www.gov.uk/topic/business-tax/ir35

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