What exactly is IR35? IR35 refers to the anti-avoidance tax legislation, which was originally designed to tax employment that was being disguised but at the same rate as employment.
Put simply, IR35 aims to stop people from avoiding taxes. First established back in 1999, IR35 was also known as disguised employees – this is where an individual would act and look like an employee of a business.
When a limited company hires someone as a contractor, they’re able to save their company a lot of money. By hiring someone as a contractor, the owner of the limited company won’t have to pay things like NICs (National Insurance Contributions).
Along with avoiding NICs, limited companies don’t have to provide the usual employment benefits such as sick leave, maternity leave, paid holidays or pensions. If you’re interested in learning more about IR35 and what it is, continue reading.
Inside IR35 is when a contractor is working and being treated as a full-time employee within a business or organisation. When you’re inside IR35, you’ll be receiving similar benefits to those who are classified as full-time employees, even if you’re working for a limited company.
HMRC carefully looks into both the workspace and contract of each individual that’s working somewhere. By looking at an employee’s work status, conditions and contract, HMRC are then able to identify whether or not they’re in or out of IR35.
Contracts that fall in the off-payroll working rules mean that you’re classed as an employee for tax purposes.
Being inside an IR35 means you get holiday pay, sickness pay and an array of other benefits like maternity leave – these are all available even if you’re working for an umbrella company. You will pay both PAYE and NICs on your earnings when your contract is deemed inside IR35.
Companies that don’t violate IR35 are classified as outside IR35. If you’re outside IR35 it means that HMRC can see that you’re operating as a genuine business.
When you’re outside IR35, it typically means that you’re able to lay yourself a salary, deal with dividends and stay responsible for having to sort out your own taxes and external payments.
Even if it’s a one-person business, being outside IR35 means you operate completely independently, with the choice to choose when you work and how you decide to work.
How’s it Decided Whether You’re Inside or Outside IR35?
HMRC decides your status when it comes to being inside or outside IR35. Looking at factors like income, past finance-related matters and the type of sectors your business works in are all part of the process when it comes to deciding whether you’re in or out of IR35.
By examining the contractor’s tax status, HMRC will conclude their decision, but there are some factors they will consider. The factors that they consider are mutuality of obligation, control and substitution.
- Mutuality of obligation – Is your business required to provide work to employees? Are you a contractor and must you accept that you need to hire employees? If the answer is yes, then the chances of you operating inside IR35 are likely.
- Control – HMRC looks at how much power the main contractor has over the business. The more control you have over your business, the more likely it is that you’ll be inside IR35.
- Substitution – Is someone else able to complete assignments, or is your business very specific on who deals with these types of documents? Depending on the circumstances of your business, you’ll be placed inside IR35.
Has IR35 Impacted the Public Sector Contractors?
Changes that are as significant as IR35 will definitely have an impact on public sector contractors. IR35 came into play on the 6th of April 2021 for those who are operating through PSCs (Personal Service Companies).
Under the rules of IR35, public sector organisations will have to assess how each worker performs and check whether they’re paying the right amount of tax based on their job role.
Those working in the public sector will be required to provide an SDS (Status Determination Statement) to any third parties.
At LJS Accounting Services, we have years of knowledge and experience under our belts – we understand how difficult it can be to gain an understanding of how IR35 works and how it can affect you if you’re part of the public sector.
Offering a wide array of services including HMRC investigations and disclosures, expert start-up advice and CIS tax disputes, our team of experts will be able to help where needed. To find out more, contact a member of our team today.