IR35 is due to be updated by HMRC in April 2020. Anything business-tax related can cause the most organised and experienced business owners, freelancers, and contractors to wonder whether or not they are fulfilling requirements as laid down by HMRC. To get you to grips with what the legislation means for you, we have summarized some essential IR35 information to give you a better understanding of how it could affect your business.

What is IR35?

IR35 was issued as part of the Finance Act 2000, and its premise was to prevent workers from avoiding tax as ‘disguised employees’. For example, contractors who have a similar working role to full-time employees at the company to whom they are supplying a service. However, they charge their services via a limited company to avoid paying more tax and national insurance.

Not all contractors, recruiters and companies are guilty of tax evasion. There are a number of workers who operate as separate entities to their clients and adhere to a strict work agreement. In these scenarios, recruiters and contractors often use payroll professionals, such as People Group Services, to handle the workers’ wages and taxes, while ensuring they are compliant with HMRC’s legislation.

Before April 2017, public sector workers were responsible for evaluating if IR35 applied to themselves. Following April 2017, however, determining the IR35 status of each worker was transferred to the company responsible for paying the worker, such as the recruitment agency or third-party company. 

In April 2020, IR35 rules will be extended to those who pay wages in the private sector, too; the onus is on the end-client to determine a worker’s IR35 status and report this to HMRC.

IR35 Rules

There are two types of relationship between a contractor and a company that is considered under IR35 regulation. One is ‘inside’: an employment relationship where the tax and NI are deducted from the worker’s wages. The other is ‘outside’: a legitimate contractor and third-party relationship which requires the worker to pay their own salaries and taxes.

There are three rules that HMRC considers, and you too should know them.

Mutuality of Obligation

If a company is not obliged to offer a person projects or tasks, and equally, that person is not obliged to accept any work projects offered, the relationship between the two entities falls outside of IR35.

Substitution

If the agreement between a worker and a company specifies the worker must be the person to complete the task from start to finish, the relationship is regarded as falling inside IR35 rules. If, however, substitute workers can fill the position and complete the work on a contractor’s behalf, the working relationship is outside of IR35.

Supervision, Direction, and Control 

If a contract between a worker and company defines working hours, plus ongoing monitoring and input regarding the work, the status of the working relationship falls within IR35 rules. Additionally, if the worker is providing extra services to the company that are not stipulated in the contract, the association shall be perceived as operating within IR35 too.

Assess IR35 Employment Status

To check the employment status of a worker for tax purposes, you can use the ‘Check employment status for tax’ test on the government’s own website. The service is anonymous and will not store any data you enter. As specified on the gov.uk website, you will need the following to acquire an accurate decision from HMRC’s tool;

• Contract details
• Worker’s duties
• The person who determines the nature of the work to be done
• The person who decides the location, time frame, and specification of the job
• How the worker will be paid
• Whether the engagement includes any corporate benefits or reimbursement for expenses

If you’re a limited company, contractor, or recruiter, establishing your IR35 status before April 2020 is vital to determine whether it will affect your income and expenses. You can seek advice from professional payroll companies or accountants. Alternatively, speak to HMRC directly for additional help.