What is IR35?
IR35 is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name. If a contractor is operating through an intermediary, such as a limited company, and but for that intermediary they would be an employee of their client, IR35 kicks in. IR35 requires the intermediary to make an extra payment to compensate for the additional tax and NI that HMRC would have received on an equivalent employee’s wages.
Whether a contractor is an employee in all but name may vary from client to client and from project to project. When determining this HMRC will look at the whole picture, but key factors are:
- Does the contractor have to carry out the work personally, rather than being able to send a substitute?
- Does the client have to provide the contractor with work, and/or does the contractor have to carry out any work that the client requests?
- Does the client have control over how, when and where the contractor carries out the work?
Answers of yes to these questions will indicate a quasi-employment relationship.
Note that HMRC will look at what actually happens (or would happen) in practice, rather than the terms of the contract. HMRC will also look at other factors, such as whether the contractor has an office at the client’s site, an email address and/or job title indicating that they are part of the client’s business, and so forth.
Sole traders are freelancers who run their own business as an individual and are personally responsible for any losses their business makes. They don’t operate through a company structure. As such, they are unaffected by the upcoming changes as sole traders are exempt from IR35 legislation.
Ross Pounds of Dinghy, which provides specialist insurance for freelancers, says: “If you carry out work for a fixed fee, are paid at the end of a project, generally work for a number of different clients (often at the same time), and have control over how, when and where you work, you are likely to be free from IR35. However, if your working hours are decided by someone else and you can be told what tasks you’re working on, where you’ll be working, and how you should work, then you may well fall under the ‘disguised employee’ banner, and therefore could be seen as being inside IR35.
What’s next for IR35?
Firms in the public sector have had to decide whether their contractors fall under IR35 since April 2017. But from 6 April 2020 this responsibility will spread to the private sector.
It’s important to note that the changes only apply to larger companies in the private sector. Businesses that meet at least two of the following criteria are unaffected by the changes: those with a turnover of less than £10.2m a year, balance sheet assets of less than £51m, or those with fewer than 50 employees.
What do employers need to do?
The requirement of the legislation states that all companies must take ‘reasonable care’ when assessing if roles are inside or outside of IR35. Taking a ‘blanket approach’ to assess all roles won’t deliver this.
There are a variety of tests available for both employers and workers to determine IR35 status.
HMRC has produced its own online test, called Check Employment Status for Tax (CEST), which gives an automated determination. HMRC will stand by that decision, provided it agrees with how the person taking the test has answered the questions.