IR35 was introduced in the year 1999 which came into force from April 2000 as part of the Finance Act. IR35 was created by the then taxation body "Inland Revenue" which is now HMRC.
IR35 is a tax regulation which is formed to contest tax avoidance by contractors who are providing services to their clients through a channel such as by forming a limited company. But in real scenario he would be an employee of the client organisation if the intermediary was not used.
The contractors who are doing this are called 'disguised employees' by HMRC. If HMRC investigates & found that the contractor is providing service to the client in a disguised way by forming a company & showing himself as a director of that company then they have to pay income tax & National Insurance assuming they were employed. The Consequence of acting as a disguised employee is very significant if caught by HMRC. The contractor's income may be reduced by 20% and which can cost thousands of pounds in additional income tax & NIC.
Why was IR35 introduced by the government?
IR35 was introduced by the government because to control the problem of disguised employment. They contractors disguise themselves by getting into a contract with the client organisations through intermediary or by forming a company showing as self-employed.
This benefit both the organisations and contractors. The contractors save a large amount of tax which they have to pay if they get employed into the organisations. And also, the employers save a significant amount of cash as they do not have top pay NICs and other employment benefits to the employees.
This can be illustrated through an example such as when a contractor leaves the organisation on Friday as an employee and then joined the organisation on Monday as a contractor or consultant through self employed company mode or through agent.
Who is affected by IR35?
Until recently, only contractors have been responsible for establishing their IR35 status. From April 2017, there is a reform in the public sector which includes the following ones.
• Hirers who are the public sector clients will determine the IR35 status of contractors.
• Calculating and deducting tax from contractors' pay are the responsibility of Agencies.
• If an IR35 assessment is incorrect then the entire responsibilities go to agencies for the unpaid tax & liability.
• As contractors are forced into payroll solutions, accountants risk losing their contractor clients.
• The IR35 'off payroll' rules will be extended to the private sector from April 2020 onwards, directly affecting a large number of contractors. This means private sector employers hiring contractors will be responsible for determining their IR35 status. If a contractor's engagement is deemed to be 'caught', then the private sector client will also be responsible for collecting income tax and NICs owed from the assignment.
Main principles of determining whether one is falling inside IR35 or not.
Control, direction & supervision: -This determines how your client control, supervise and direct the work that you do for him. Suppose you have to do your client's work for a particular time every day, then it deemed to be an employment.
If a contract that specifies the content that when a contractor can start, finish the work and also the days to be worked then the contract is likely to be within IR35. It also comes within IR35 if client is overseeing the work excessively and always providing guidance to complete it. If a contractor also works on different tasks of the client, then it also comes under the scanner of IR35.
Substitution: -This principle means that the work that you are doing for your client, can be done by you only or you can send someone else only to do the work on your behalf. The contract should specify that a contractor with whom the contract has been made can send another person to do any work for client on his behalf. If there is a restriction in the contract that only one who is in the contract can do the work of client and nobody else, then it will fall inside IR35.
Mutuality of obligation (MOO): -This principle states that whether the contractor has any obligation on the employer's end to provide service then it is called the mutuality of obligation, and if it exists then the contract will fall within IR35.
If the client is obliged to offer work and you are also obliged to do the work then it straight forward takes into the contract of an employment. Normally a self-employed contract means doing work for a client on project by project basis. If the contractor has an obligation to complete a notice period, that would of similar length to if they were an employee. Also, if one is pure consultant then he should provide services to various clients instead of one client so if serving one client then it can come inside IR35.
More options to determine whether a contractor is falling inside IR35 or not.
a) Payment made to the contractor: - The payment which is made to the contractor are basically project basis that is when the project gets completed or on milestone basis. If this does not happen then it will come inside IR35.
b) Purpose of the contracts:- The purpose of the contract must be according to the law i.e. the relation between the contractor and client must be just like a supplier & customer. If it gets breached then HMRC will consider the contract inside IR35 & will reject he contract.
c) Being an integrated member to the organisation: - If the contractor become an integrated part of the client's company where people are reporting to them then it becomes one type of employment rather than self-employed. The contractor could be affected by IR35 if he has any involvement with your client's corporate structure.
d) Single self-employment:- If the contractor provides service to the only one client and have no other clients then then it draws the attraction of IR35.
e) Structure of business: - If a contractor is doing is business in a right way then his business will have a proper work place, a website, more than two or three employees, then HMRC will consider the business as operating & will fall outside IR35.
f) Monetary risk: - If one is contractor & self-employed then one has to take a financial risk. Usually there is a requirement of business insurance which will indemnify the loss if any arises during the process of providing services to the client.
g) Equipment: - If the contractor is using the equipment of the client then HMRC assumes that the contractor is a disguised employee.
As you can see from the above, IR35 rules are complex. If you disagree with a decision made by your end client about your IR35 status, you should immediately seek professional advice. Ideally, this should be before you start working on the contract. We at www.conclique.com will look at your case extensively and use our expert advisors' experience to make a recommendation so you know where you stand.
You should then present your advisor's opinion to the end client and ask them to reconsider their position. Often there might be factors the end client hadn't thought about during its assessment of IR35.
IR35: New off-payroll working rules declared by HMRC for the private sector from April 2020.
Key Highlights
HMRC has introduced a consultation on the implementation of the reform for the off-payroll working rules from April 2020.
The Government has declared that the reforms which were framed for the organisations of public sector in April 2017 will be also applicable for the organisations of private sector from April 2020.
The People who will get attract of this new reform declared by HMRC are the contractors who are providing services to the clients through an intermediary such as companies, agencies or partnerships.
The government has announced the reforms in the budget 2018. This will increase the compliance with the existing off-payroll working rules in the private sector. The organisations will become responsible for assessing the employment status of the off-payroll workers who they engage. This will bring the private sector in line with the public sector.
The duration of this consultation is from 05th March, 2019 to 28th May2019. HMRC has launched the consultation on 5th March,2019 and the respondents can provide their feedback up to 28th May 2019.
HMRC will enhance the CEST (Check Employment Status for Tax ) service which was launched in 2017 to determine the status of IR35. HMRC developed the CEST service to help clients decide:
a) The status of their off-payroll workers; and
b) Whether the off-payroll working rules apply.
After the completion of consultation process a summary of responses will be published later this year. The consultation will inform the draft Finance Bill legislation, which is expected to be published in Summer 2019. The reform will come into force from 6 April 2020.
Client required to provide the status determination and reasons for determination to person they contract with and off-payroll worker. Off-payroll workers have the right to ask for reasons for determination directly from the client.
Key Issues
The consultation clearly states that the same reforms which was introduced for Public sector will also be same for the private sector this time.
For the reforms of off-payroll working rules in the private sector, the contracts of the contractors will not be assessed personally as it was happened when public sector reforms introduced.
There is a great doubt that whether the government will actually analyse the feedback that will be provided in the consultation process or this is just a mere process work before finalising the rule.
Earlier the government has declared that they have achieved success after implementing the off-payroll working reforms in the public sector without evaluating & carrying out proper compliances.
HMRC had earlier carried out the CEST (Check Employment Status for Tax) but could not provide accurate results. But this time it will enhance the CEST, now the question is how much it can be trusted.
This off-payroll working reforms will give a major throwback to the contractors as HMRC will not assess their contracts on an individual basis and instead of that they will give decision which will cover everyone.
Action needs to be taken
As you can see from the above, IR35: off-payroll working rules are complex. If you disagree with a decision made by your end client about your IR35 status, you should immediately seek professional advice. Ideally, this should be before you start working on the contract. We at www.conclique.com will look at your case extensively and use our expert advisors' experience to make a recommendation so that you can know where you stand.
You should then present your advisor's opinion to the end client and ask them to reconsider their position. Often there might be factors the end client hadn't thought about during its assessment of IR35.
Our Contact details
Conclique Technologies Services Limited
Company Number:- 11752924
Registered office address:- 31 Mccartney Walk, Basingstoke, Hampshire, RG22 4NZ
Website:- www.conclique.com
Phone:- +44-7872909859 / +44-20 86388488 / Email: - rudrenduroy@conclique.com