IR35, also known as “Off-Payroll Working” in the UK, is a set of tax rules and regulations introduced by Her Majesty’s Revenue and Customs (HMRC) to determine the tax status of individuals who provide services through an intermediary, such as a personal service company (PSC), rather than being directly employed by a company or organization.
The main aim of IR35 is to prevent what HMRC considers to be “disguised employment.” In other words, it’s designed to identify and tax individuals who work in a manner that is similar to regular employees but use an intermediary, such as a PSC, to reduce their tax liability.
Key points about IR35 include:
- Determining Employment Status: The central concept of IR35 is the assessment of whether a worker would be classified as an employee for tax purposes if they were directly engaged by the client or organization.
- Factors for Assessment: To determine whether IR35 applies, several factors are considered, including control, substitution, mutuality of obligation, financial risk, and integration into the client’s organization.
* If you are subject to significant control by the client or employer, such as being told when, where, and how to work, you may be considered inside IR35.
* If you cannot send a substitute to do the work in your place, you may be seen as inside IR35.
* If there is an ongoing obligation for the client to provide work and for you to accept it, this could indicate an inside IR35 relationship.
* If you do not bear any financial risk for the work you do (e.g: you are paid a fixed salary), you might be considered inside IR35.
* If you are integrated into the client’s business and operate as if you were an employee (e.g., you have a company email address, attend company meetings), you may be inside IR35.
* Various other factors, such as whether you receive employment benefits, use company equipment, or have a long-term engagement with a single client, can also impact your IR35 status. - Responsibility for Assessment: Before April 2021, in most cases, the responsibility for determining IR35 status rested with the contractor or worker. However, after this date, for medium and large-sized organizations in the private sector, the responsibility for determining IR35 status shifted to the client or end-client that engages the contractor.
- Tax Implications: If a contractor is found to be inside IR35, they are considered an employee for tax purposes, and the client is responsible for deducting Income Tax and National Insurance Contributions (NICs) from their payments. If outside IR35, the contractor continues to manage their own taxes.
- Penalties and Interest: Non-compliance with IR35 rules can lead to penalties and interest charges, so it’s essential for both contractors and clients to get the assessment correct.
- Small Businesses Exemption: Small businesses in the private sector (meeting specific criteria) are exempt from the requirement to determine IR35 status, meaning the responsibility remains with the contractor. It’s always best to have asked any sub contractors if they are within the IR35 so that you have proof that you have done your due diligence.
IR35 regulations are complex and can have a significant impact on contractors and clients alike. The best person to advice you on this would be your accountant.
If you’re a member of the FSB, you can also get free advice on this via their legal helpline.
