How to determine if you are "Inside" or "Outside" IR35?
IR35 is the name given to a legislative tax that aims to identify individuals who avoid paying the tax they should be paying. The IR35 legislation specifically challenges those individuals who deliver their services to clients via their own company, often known as a 'personal service company, whether a limited company or a limited liability partnership. In the ever-watchful eyes of HMRC, they are classified as 'disguise employees'. It means that HMRC does not recognise the contractor in question as 'self-employed' from a taxation perspective, and therefore, they should be taxed the same way a permanent employee should be, thus falling inside what is called IR35.
The Off-Payroll working rules, first introduced in 2000, labelled as "IR35 Reform", came into force in the public sector in April 2017 and extended to medium and large businesses in the private sector in 2021. These reforms made companies responsible for their contractors' IR35 status and the associated taxes. To ensure better tax compliance and to create a more streamlined process, the government introduced changes that helped shift responsibility for determining a worker's status to the client or end user.
for example, those working through an umbrella company were not directly impacted by the changes. However, some individuals working through a limited company –previously outside IR35 found that their status had changed. The legislation differentiates between individuals who are 'inside' IR35, whose tax deductions are made at source through PAYE, and those who are 'outside' IR35, they can calculate their deductions. In short, the legislation shores the 'role' of contractors working for clients by assessing whether they are closer to self-employed or employees.
How is a contractor's IR35 status determined?
Changes to the IR35 legislation in the private sector came into effect in April 2021. For those contractor(s) working through a limited company in the UK, your IR35 status will determine how you will need to correctly pay tax and national insurance. These IR35 changes applicable to the private sector from 2021 mean that end clients are now responsible for determining whether the working practices of the contractors they engage with fall inside or outside the legislation. For a contractor to fall outside, the end client needs to use 'reasonable care while looking at their IR35 status and issue the contractor or third-party they hold a contract with a status determination statement (SDS) once completed.
Inside or outside IR35?
The changes in 2021 rolled out the new classifications of being inside or outside IR35 for those in the private sector. While we understand that the healthcare professionals working in the public sector have been subject to this legislation since 2017, and employees working in smaller organisations – those who have an annual turnover of no larger than £10.2 million, for them no more than 50 employees and assets totalling to no more than £5.1 million are exempted.
The IR35 reforms impact limited companies the most. With the onus shifting to the end user to decide on contractors' contractual status, some workers found that their status had changed in terms of IR35. This also sometimes leads to uncertainty about how parties could find out their status.
Whether you are beginning a new contract, or are subject to a change in your contracting status, your end user will need to assess your status. Once this assessment has been carried out, they should provide you with a status declaration statement (SDS) that confirms whether you are inside or outside IR35.
Along with the SDS document, they should also justify the reasoning behind this declaration. If your contracting status has changed or you want to enquire about your status, you must keep this document safe and handy. And if you haven't received an SDS, you can ask your end user to provide one.
If you're wondering and are unsure about what your status will be when you take up a new role, then the government's online CEST tool is available which helps end users and agencies find out what their status might be. To pursue this, you will need to provide some vital information such as an overview of the work that you will carry out, your role and responsibilities, and how you will be paid, after which you should be indicated your status.
This tool, however, has not always led to conclusive results. It’s worth considering an IR35 assessment service to determine and demonstrate their status to HMRC, and potentially their clients and agencies. A Tax Investigation Service can help further mitigate the risk to the contractor when the legislation points back to them. It's also worth considering an IR35 Shield service that can provide a comprehensive, impartial solution for contractors and includes unlimited IR35 assessments.
Impact of IR35 on companies
How does IR35 impact limited and umbrella companies?
As an individual working through an umbrella company, your tax and national insurance is already deducted at the source, so you don't need to worry about IR35.
If you're deemed to be inside IR35, your end user will need to make the necessary deductions from the fee for your work before payment is made as your status is closer to being an employee of the end user. If you're outside, you will need to take steps to accurately calculate your deductions as you're equivalent to being self-employed. You should make sure that you can prove your status in case of an IR35 enquiry, which can last for long periods. Make sure you keep hold of all invoices, records of employment, details of any registered offices and any other important documentation or information relating to your work in case of such an enquiry, and for your limited company to meet compliance requirements.
Moving Forward:
The new chancellor, Jeremy Hunt has scrapped the planned reversal of IR35 reforms, along with almost all tax measures which the former chancellor Kwasi Kwarteng previously announced in his mini-budget on 22 September 2022.
It is said to be a huge U-turn for those self-employed such as facility contractors and others. And at these extraordinary times and after weeks of turmoil, the current govt aims to calm markets and bring stability to the UK's economy. Until the full details of the Finance act are revealed, it is best to try to plan forward. HMRC has promised further guidance for contractors.
Advice for contractors over the next few months:
Speak to your client and find out their position come April 6th, 2023, especially if you are contracting with an organisation with limited PSCs.
Collect and keep all evidence, including SDS outcomes, online IR35 status tool outputs, end-client correspondence, contract review results, and operational practice changes/opinions.
Find out about your situation as soon as possible to see what the available options are and (above all else) the risks involved and if a change in your status is feasible.
Interested in getting more Facilities and Interim Management guidance for yourself and your teams?
Grab our fail proof PDF Guide for free here!
