IR35 is a piece of legislation that requires contractors and enterprises to pay the correct amount of tax. So, how do these tax rules operate, and are you paying the correct amount of tax?
IR35, often known as off-payroll working regulations, is a piece of tax legislation designed to ensure that contractors who appear to be self-employed but are hired pay the necessary amount of tax. This section explains how the legislation works and if it applies to you.
What is IR35?
IR35 refers to UK tax legislation enacted in April 2000 to ensure contractors pay the correct amount of income tax and National Insurance contributions (NICs).
The IR35 laws apply to individuals who are essentially functioning as employees but have registered as a limited business or work for a third party to offer a service to give the impression that they are self-employed.
These "disguised employees" may aim to save money by avoiding paying the tax and NICs that they would owe if they were considered employed. Employers may benefit as well, as they can avoid paying employers' NICs and offering employee benefits such as vacation and sick leave.
Who do the IR35 rules apply to?
The IR35 rules apply to the following:
Workers: Providing their services through an intermediary
Clients: Receiving services from a worker through their intermediary
Agencies: Providing workers’ services through their intermediary
What does inside IR35 mean?
If you are 'within IR35,' you are considered an employee for tax reasons and are liable to Pay As You Earn (PAYE).
Contractors who fall within IR35 must pay the same income tax and NICs as regular employees.
If an employer hires contractors outside of IR35, they must additionally pay to match NICs to the government.
What does outside IR35 mean?
If you are 'outside IR35,' you are not regarded as an employee of the client who is utilizing your services.
Contractors working outside of IR35 must ensure that they pay the correct amount of tax outside of the PAYE system.
How do I know whether I’m inside IR35?
If you are given the same privileges as a permanent employee, you are most likely in IR35. This includes, but is not limited to, yearly leave, sick pay, employee perks, and membership programs.
Based on the information provided, HM Revenue and Customs (HMRC) provides a check employment status for tax service to assist you in determining if the IR35 laws apply to you.
HMRC considers the following elements to determine your IR35 status:
Control l : The degree of control a contractor has over what, how, when, and where their work is completed. So, if you don't have control over how you do your work, your contract falls under IR35.
Substitution: When a contractor must perform the task themself or has the option of sending a replacement. So, if you have to carry out the deal personally, it will come under IR35 once more.
Mutuality of obligation: Mutual duty refers to whether a client is required to offer you employment and you are required to accept it.
What is a mutuality of obligation (MOO)?
Mutuality of obligation (MOO) is one of the measures used to determine whether an individual is an employee or a contractor.
The MOO test has two main components:
-Is an employer required to hire an individual?
-Is the person obligated to do the work offered?
If both of these characteristics are present, it indicates that an employment contract exists, hence qualifying the worker as an employee. This implies that the employee may be subject to IR35. If one of these factors is absent, it may indicate that the worker is self-employed. This suggests that the employee may be exempt from IR35.
Do I need to use an IR35 contract review service?
An IR35 contract review service employs an impartial tax specialist to examine a person's employment contract to determine whether they are subject to IR35.
Contractors are not required by law to use IR35 contract review services. It could, however, be a useful choice for self-employed people who have a poor understanding of IR35 laws or who just want a second opinion to validate their tax position.
Who is exempt from IR35?
Small businesses are exempt from IR35 rules. A small business is defined as meeting two or more of the following criteria:
Annual turnover: No more than £10.2 million
Balance sheet: No more than £5.1 million
Employees: No more than 50 employees
Is IR35 only available for limited companies?
IR35 applies only to limited companies. It was created to ensure that persons who work through a middleman pay the correct amount of tax.
Does IR35 apply to sole traders?
Because sole traders work as self-employed individuals rather than through a limited corporation, IR35 does not apply to them.
It is crucial to note that the regulations governing employment status for tax purposes are identical to those governing IR35. The employment status test for sole proprietors also considers a person's work arrangements and daily activities. If you or someone else is self-employed for tax purposes, you can check on Gov.UK or call HMRC if you can't check online.