IR35 refers to the tax legislation under which contractors working through an intermediary are taxed.
The new IR35 changes come into force on 6th April 2020 and will be extended to the private sector to ensure that UK contractors pay the same tax and National Insurance contributions as an equivalent employee would.
Awareness of the IR35 changes is key and it should be taken as an opportunity to review the tax status of your workforce and introduce changes for protecting your business from the legal risks associated; such as processes to determine if the off-payroll rules apply to future engagements.
For helping you out, below are the key areas we recommend looking at when it comes to determining IR35 status. It’s important to note that HMRC will look at a wide range of areas to determine employment status – but the checklist below does give a helpful indication whether income from a particular contract is subject to the IR35 rules.
What should businesses do now to prepare for the IR35 changes?
A good starting point is to look at your current workforce to identify those individuals who are supplying their services through personal service companies.
If there are any contractors in the supply chain, talk about their IR35 status. This will give you the opportunity to ascertain any differences in opinion about a contractor’s status at a company level before HMRC involvement.
IR35 status checklist
The next key areas will shed some light for determining the IR35 status of a worker:
- Control: The level of control is key. It is indicative of self-employment if a worker is merely measured against agreed outcomes/deliverables and can work in their own manner. However, if there is a right to control how work has to be carried out, it is indicative of employment.
- Substitution: Contracts of employment do not have a right of delegation or substitute. If this right is included in the contract then it is a strong indicator of self-employment.
- Mutuality of obligation: Mutuality of obligations points towards employment. For example, the client is obliged to offer work and the worker is obliged to accept it. Non-mutuality points towards self-employment.
- Defined task: If a worker is engaged simply as a “helping hand” then this points towards employment. By contrast, if he/she is engaged to carry out a specific task, at the end of which the engagement ends, then this points towards self-employment.
- Remuneration: Employees are paid on a time basis while being paid for a project or at fixed price points towards self-employment.
- Provision of equipment: If the company equipment is used then that is indicative of employment. If the worker uses personal equipment then that points towards self-employment. Allowances can be made where security measures prohibit the use of someone using their own laptop for example.
- Employee benefits: In simple terms, receiving holiday pay, sick pay, pension contributions and training courses are all benefits that should only apply to employees of the company.
- Simultaneous contracts: If a worker works for different clients then this points towards self-employment.
- Risk: Employees rarely risk financial loss by being employed, whereas if a worker has a risk of losses then that points towards self-employment. Risks could be the responsibility for rectification of errors and mistakes or the financial risk of a project overrun.
IR35 has become a highly complex area of employment and tax law, so we recommend seeking expert opinions when determining IR35 status.
Book a call with our legal team here and speak to one of our specialists.