December 9, 2019
Do you use contractors? Or are you a contractor? If the answer is yes, then you need to consider IR35 and whether you fall inside of the regulations.
IR35, also known as intermediaries legislation First introduced in 2000, IR35 is designed to reduce tax avoidance by contractors who HMRC believe to be “disguised employees” – people who work in a similar way to full-time employees but bill for their services via their limited companies to make their business as tax efficient as possible. The recent review by Government means that the private sector is now included within these regulations from 6 April 2020.
To show that there is no employment relationship, the contractor has to prove certain relationship criteria to determine whether they are ‘inside’ or ‘outside’ IR35. As a rule of thumb, IR35 won’t apply if the contract is for the services you provide instead of employment. It’s a good idea to keep the following three things in mind when deciding if your business falls inside or outside of IR35:
1. Mutuality
Working as a self-employed contractor means that a person can work on a project-by-project basis without any obligation to continue working for one business once the contract comes to an end. Equally, business under no obligation to continue offering contracts once the project is complete. If the contract between the contractor and business states that the contractor cannot take on any other clients whilst working for the business then this places them within IR35 and their tax responsibilities will fall upon the business.
If the business is obliged to provide the contractor with continuing work then they are likely to be considered an employee, meaning they will fall within IR35.
2. Substitution
If the supply/consultancy contract states that only the contractor can attend to see a job through from start to finish, then this working relationship will fall within IR35 rules. In order to remain outside of IR35 the contract should highlight that the substitute workers the contractor puts forward can complete the contract work instead should the contractor not be available.
3. Supervision, direction, control
Contractors must have control over how they complete their work for a contract to fall outside of IR35. If a contract sets working patterns and the business provides excessive input over how work is completed, then it’s likely that this will fall under employment rather than contract work.
If the contractor passes the test, they are ‘outside’ of IR35 rules, and can continue to invoice then pay themselves through their own limited company. If they are deemed ‘inside’ IR35 and HMRC declares that it’s an employment relationship, then tax and National Insurance will be deducted from their earnings and the liability for any missing tax lies with them.
Sole Traders:
IR35 does not affect sole traders. The IR35 legislation applies only to incorporated businesses and therefore a sole trader cannot be caught by IR35. Although IR35 doesn’t apply to sole traders, employment status does, and the rules for determining employment status are very similar to the rules for determining IR35 status.
Sole trader will not carry any liability for their own employment status, therefore the liability will fall on the instructing company for tax and national insurance payments.
If you require any further advice or consultation on your contracts, then please do not hesitate to contact us today. Tel: 0161 667 3686 email: zara@prosperitylaw.com
