With IR35 just around the corner, Hayward Hawk have compiled a list of the most frequent questions they have been asked by contractors/candidates over the past few months.
What is IR35?
IR35 is a government HMRC tax legislation dealing with self-employed workers. It comes into effect on April 6th 2021. IR35 is designed to determine whether a contractor would be classified as an employee if they (hypothetically) were working directly for the client, rather than through a limited company. If they would be, this is commonly called ‘inside IR35’.
A contractor who would not be classified as an employee of the client, is self-employed and this is referred to as being ‘outside IR35’.
Somebody whose engagement is treated as being inside IR35 would end up paying the same rate of tax as somebody employed in a permanent position. Any contracting role considered to be ‘inside IR35’ will have to have PAYE tax and national insurance contributions deducted at source. Somebody outside IR35 is treated as fully self-employed, and will usually have a lower tax liability.
What companies does this apply to?
The off-payroll working rules already apply to the public sector. From 6 April 2021, these new IR35 rules will also apply to all private sector companies who are classified as ‘medium’ or ‘large’. This means an organisation which satisfies 2 or more of the following conditions:
- an annual turnover of more than £10.2m
- a balance sheet total of more than £5.1m
- more than 50 employees
Who determines if the contract is inside or outside IR35?
The end client will make the determination as to whether the contractor’s assignment is deemed inside or outside IR35.
How will it be determined if the assignment falls inside or outside of IR35?
From April 6th 2021, the end client will make that determination. They can carry out a series of steps in order to conclude whether an assignment is inside or outside IR35.
One method is using the CEST assessment tool. This is a free tool designed by HMRC https://www.gov.uk/guidance/check-employment-status-for-tax .
As the CEST tool is non-mandatory, clients can manually assess each and every contract. The downside of manual assessments is the time it takes to evaluate all contractors and the increased likelihood of mistakes.
Another alternative, is using the AI-driven, SHIELD. SHIELD is a blend of manual evaluation and advanced analytics.
Why is the Government doing this?
The Government’s reasons for making these changes are because many temporary workers were declaring themselves as outside IR35, and so benefitting from a lower rate of tax, when in fact their true circumstances were that they were inside IR35. As a result, limited companies who should have been collecting and paying over to HMRC the correct rate of tax for the contractor, were not doing so.
This legislation is designed to ensure that contractors who work via a limited company, whose engagement is deemed to fall inside IR35, pay the correct tax on their income from their engagement, i.e. that they pay the same tax rates as people doing equivalent jobs in a permanent position.
What it means to be ‘Inside’ and ‘Outside’ IR35?
- Classed as an ‘employee’ for tax purposes
- Required to pay national insurance and employment taxes
- PAYE income tax and national insurance contributions deducted at source.
- Deemed self-employed and operate as a proper business
- Responsible for your business’s taxes
- Can pay yourself in a tax-efficient way
What do I do if my role falls inside IR35?
Whoever pays you (client, agency or third party) will deduct your tax contributions and national insurance.
How do pension contributions work inside IR35?
Whether you are going to be working inside or outside IR35, your pension contributions will not need to change & you will continue to receive pension relief from the government.
Can I work through my private limited company if my contract is deemed inside IR35?
You can continue to work through your limited company even when a contract is inside IR35. It means you need to make a ‘deemed payment’ to HMRC for the contracts caught inside the rules.
So it’s perfectly possible for professional contractors to have a mix of contracts both inside and outside of IR35.
However, there is also the option of operating through an Umbrella company.
- Contractors whose work is considered as inside IR35 may wish to look at working through an ‘Umbrella’ company arrangement without the associated costs of operating a PSC. An umbrella company acts as an ‘employer’ intermediary to agency contractors who work under fixed term contract assignments (essentially replacing a contractor’s own PSC).
What do I do if my existing contracts run beyond April 6th?
You will need to speak with the end client or your agency, who will inform you as to how your contract may fall – some contracts may be moved inside IR35.