IR35: Determining Whether Your Assignment and Contract Fall Inside or Outside

If you’re a contractor, you may have heard of IR35 and wondered if it applies to you. IR35 is a piece of UK tax legislation aimed at tackling tax avoidance by workers who provide their services through a limited company, which would otherwise deem them employees. Since its introduction in 2000, IR35 has seen several updates to adapt to the evolving workforce landscape.

Determining whether your assignment and contract fall inside or outside IR35 can be a complex process. HMRC will look at each individual’s contract and their workspace to determine whether or not they are inside or outside IR35. Factors that are taken into consideration include the level of control you have over your work, whether you are required to provide your services exclusively to one client, whether you can send a substitute to perform the work, and whether you are paid by project milestones or by the hour. Understanding the nuances of IR35 can be challenging, but it’s important for contractors to get it right to avoid potential penalties and back taxes.

Understanding IR35

If you are a contractor or freelancer, it is essential to understand IR35 and how it may impact your assignment or contract. IR35 is a set of tax legislation that aims to prevent tax avoidance by workers who provide services to clients through an intermediary, such as a limited company, but who would be considered employees if they were engaged directly.

History and Purpose of IR35

Introduced to combat “disguised employment,” IR35 aims to ensure tax and National Insurance fairness among contractors and employees alike. Its historical context and ongoing relevance underscore the importance of staying informed and compliant.

IR35 Rules and Criteria

The rules of IR35 are complex, and it is important to understand the criteria that determine whether your assignment falls inside or outside IR35. HMRC will look at several factors to determine your employment status, including:

• Supervision, Direction, and Control (of the worker)
• Mutuality of Obligation (MOO)
• Right of Substitution
• Provision of Equipment
• Financial Risk
• Integration

If your contract is found to fall inside IR35, you will be considered an employee for tax and National Insurance purposes, and your income will be subject to PAYE deductions. On the other hand, if your contract falls outside IR35, you will be taxed as a self-employed individual, and you will be responsible for paying your own tax and National Insurance contributions.

Determining IR35 Status

When it comes to determining your IR35 status, there are a few key factors to consider. These factors will help you determine whether your assignment or contract falls inside or outside of IR35 regulations.

Status Determination Statement (SDS)

The first thing to consider is the Status Determination Statement (SDS). This is a document that your client or end hirer must provide you with. It outlines whether your assignment is inside or outside of IR35. If your assignment is inside IR35, you will be subject to the same tax and National Insurance contributions as an employee.

Factors Affecting Employment Status

To determine whether your assignment falls inside or outside of IR35, your client or end hirer will consider a range of factors affecting your employment status. These include:

• Supervision, direction, and control: If your client has a high level of control over how you complete your work, your assignment may be inside IR35.
• Substitution: If you are required to perform the work yourself and cannot send a substitute, your assignment may be inside IR35.
• Mutuality of obligation: If your client is obliged to offer you work and you are obliged to accept it, your assignment may be inside IR35.
• Provision of equipment: If your client provides you with all the necessary equipment to complete your work, your assignment may be inside IR35.
• Financial risk: If you do not bear any financial risk for your work, your assignment may be inside IR35.

Inside vs Outside IR35

If your assignment falls inside IR35, you will be subject to the same tax and National Insurance contributions as an employee. This means that you will not be able to take advantage of the tax benefits that come with being self-employed.

On the other hand, if your assignment falls outside IR35, you will be able to take advantage of the tax benefits that come with being self-employed. This means that you will be responsible for paying your own taxes and National Insurance contributions.

Contracts and Working Practices

Contract Review for IR35

When determining whether your assignment or contract falls inside or outside IR35, it is important to review the terms of your contract. HMRC will “look beyond” your actual contract and examine the working practices you follow on each assignment if they decide to query your IR35 status. However, having an accurate and well-drafted contract is a good starting point.

The contract should be consistent with what actually happens in practice. If your contract states you are not subject to the direct control of the client but, in fact, you are, then the contract is unlikely to be considered a true reflection of the working arrangement. You should also ensure that the contract allows for substitution, as this is an important factor in determining whether you are inside or outside IR35.

Working Practices Analysis

In addition to reviewing your contract, HMRC will also examine the working practices you follow on each assignment. As More Than Accountants notes, factors such as the level of control you have over your work, whether you are required to provide your services exclusively to one client, and whether you can send a substitute to perform the work are all important considerations.

One key factor is the mutuality of obligation. This refers to the obligation of the client to provide work and the obligation of the contractor to carry out that work. If this obligation exists, it may indicate that you are inside IR35. However, if you have the right to refuse work and the client has no obligation to provide it, this may indicate that you are outside IR35.

Control is another important factor. If the client has significant control over how, when, and where you carry out the work, this may indicate that you are inside IR35. However, if you have more control over these factors, this may indicate that you are outside IR35.

Financial Implications of IR35

Falling inside IR35 carries notable financial implications, affecting your tax liabilities and how you process payroll and NICs. Awareness and preparation for these impacts are crucial for contractors and freelancers.

Tax Liabilities and Deductions

As a contractor, if your assignment falls inside IR35, you will be treated as an employee for tax purposes. This means that you will be subject to income tax and national insurance contributions (NICs) on your total income, less any allowable expenses. However, you will not be entitled to claim the same tax deductions as a limited company contractor.

National Insurance Contributions

If your assignment falls inside IR35, you will be required to pay both employee and employer NICs. This means that you will be responsible for paying the same amount of NICs as an employee, as well as the employer’s NICs that would normally be paid by your client. This can significantly increase your tax bill.

Payroll and PAYE Obligations

If your assignment falls inside IR35, your client will be responsible for deducting income tax and employee NICs from your payments before they are made to you. This is known as Pay As You Earn (PAYE) and your client will be required to operate a payroll system to ensure that these deductions are made correctly.

Roles and Responsibilities

When it comes to determining whether your assignment and contract fall inside or outside IR35, there are certain roles and responsibilities that each party involved must be aware of. These include the contractor, client, and agency, if applicable.

The Contractor’s Obligations

As a contractor, it is your responsibility to ensure that your assignment and contract fall outside of IR35. This means that you must take steps to demonstrate that you are not an employee of the client, but rather a self-employed individual providing services to them. Some ways to do this include:

• Having a well-written contract that clearly outlines the nature of the services you will provide, the duration of the assignment, and the payment terms.
• Ensuring that you have control over how you carry out the work, including the tools and equipment you use.
• Being able to substitute yourself with another individual to carry out the work if necessary.
• Demonstrating that you are taking on financial risk as a result of the assignment.

The Client’s Obligations

The client also has certain obligations when it comes to determining whether an assignment and contract fall inside or outside of IR35. They must take steps to demonstrate that they are engaging a self-employed individual and not an employee. Some ways to do this include:

• Allowing the contractor to have control over how they carry out the work, including the tools and equipment they use.
• Allowing the contractor to substitute themselves with another individual to carry out the work if necessary.
• Not providing the contractor with the same benefits that an employee would receive, such as sick pay or holiday pay.
• Not providing the contractor with a guarantee of work beyond the current assignment.

The Agency’s Role

If you are working through an agency, they also have a role to play in ensuring that the assignment and contract fall outside of IR35. They must take steps to demonstrate that the contractor is self-employed and not an employee. Some ways to do this include:

• Ensuring that the contract between the client and the contractor is well-written and clearly outlines the nature of the services being provided.
• Ensuring that the contractor has control over how they carry out the work, including the tools and equipment they use.
• Ensuring that the contractor is able to substitute themselves with another individual to carry out the work if necessary.
• Ensuring that the contractor is taking on financial risk as a result of the assignment.

IR35 in Different Sectors

The application of IR35 varies across sectors, with specific considerations for public, private, and small businesses. Each sector faces unique compliance challenges and obligations under IR35.

Public Sector Compliance

If you work in the public sector, you need to be aware of the IR35 rules. Since April 2017, public sector employers have been responsible for determining whether a worker is inside or outside of IR35. If you are deemed inside IR35, your income tax and National Insurance Contributions (NICs) will be deducted at source.

Private Sector Considerations

If you work in the private sector, you need to be aware of the IR35 rules. From April 2021, medium and large-sized businesses will be responsible for determining whether a worker is inside or outside of IR35. If you are deemed inside IR35, your income tax and NICs will be deducted at source.

Small Business Exemptions

If you work for a small business, you may be exempt from the IR35 rules. A small business is defined as having an annual turnover of less than £10.2 million, a balance sheet total of less than £5.1 million, and fewer than 50 employees. If you work for a small business, you will be responsible for determining whether you are inside or outside of IR35.

It is important to note that the IR35 rules are complex and can be difficult to navigate. Make sure you seek professional advice to ensure that you are compliant with the rules.

Managing IR35 Risks

If you are a contractor or freelancer, you need to ensure that your assignment and contract are outside IR35, as being inside IR35 can have significant financial risks. Here are some strategies to manage your IR35 risks:

Risk Assessment Strategies

You should conduct a thorough risk assessment of your assignment and contract to determine whether they fall inside or outside IR35. You can use HMRC’s Check Employment Status for Tax (CEST) tool or seek professional advice from an accountant to help you with the assessment.

Professional Advice and Support

It is recommended that you seek professional advice and support from an accountant who has expertise in IR35 legislation. They can help you to understand the complex rules and regulations and ensure that your assignment and contract are compliant with the legislation.

IR35 Insurance and Protection

You can also consider taking out IR35 insurance and protection to safeguard yourself against the financial risks of being investigated by HMRC. This insurance can cover the costs of legal fees and other expenses that may arise during an investigation.

By following these strategies, you can manage your IR35 risks and ensure that your assignment and contract are outside IR35. However, there is no foolproof way to avoid being investigated by HMRC. Therefore, it is always advisable to seek professional advice and support to ensure that you are fully compliant with the legislation.

Recent Reforms and Changes

If you are a contractor or freelancer, it is important to stay up-to-date with the latest changes to IR35. The rules around IR35 have been subject to several reforms and changes in recent years. In this section, we will discuss the most significant changes that have taken place.

2017 Public Sector Reform

The 2017 Public Sector Reform was a significant change to the IR35 rules. Before this reform, contractors were responsible for determining their own IR35 status. However, after the reform, public sector clients were given the responsibility of determining the IR35 status of their contractors. This meant that if a contractor was found to be inside IR35, the client would be responsible for deducting tax and National Insurance contributions from their pay.

Off-Payroll Working Rules

The Off-Payroll Working Rules, also known as IR35, were introduced in April 2000. These rules were designed to prevent contractors from using intermediaries, such as personal service companies, to avoid paying tax and National Insurance contributions. The rules were extended to the public sector in 2017 and will be extended to the private sector in April 2024.

Impact of COVID-19 on IR35

The COVID-19 pandemic has had a significant impact on the IR35 rules. In 2020, the government announced that the changes to the IR35 rules in the private sector would be delayed until April 2021 due to the pandemic. However, the changes were eventually implemented in April 2021. The pandemic has also led to a rise in the number of contractors and freelancers, as many people have lost their jobs or have been forced to work from home.

Preparing for an IR35 Assessment

If you are a contractor or freelancer, it is important to prepare for an IR35 assessment to determine whether your assignment and contract falls inside or outside of IR35 legislation. IR35 is a set of tax laws that aim to prevent tax avoidance by workers who provide services to clients through an intermediary, such as a limited company, but who would be considered employees if they were engaged directly.

Documentation and Record-Keeping

To prepare for an IR35 assessment, it is essential to maintain accurate records and documentation. You should keep a record of all your contracts, invoices, and payments received from clients. This documentation will help you prove that you are operating outside of IR35 legislation and are not a disguised employee.

You should also ensure that your contract is IR35-proof, which means that it should demonstrate that you are a self-employed contractor and not an employee. Your contract should include clauses that show that you have control over your work, such as the ability to substitute yourself with another worker. It should also state that you are not entitled to employee benefits, such as sick pay, holiday pay, or pension contributions.

Best Practices for Contractors and Clients

To ensure that your assignment and contract falls outside of IR35 legislation, both contractors and clients should follow best practices. As a contractor, you should ensure that you are providing a genuine service to your client and that you have control over your work. You should also avoid working for just one client for an extended period, as this could be seen as evidence that you are a disguised employee.

Clients should ensure that they are not treating contractors as employees. They should avoid providing benefits that are typically given to employees, such as sick pay, holiday pay, or pension contributions. Clients should also ensure that they are not providing excessive supervision, direction, or control over the contractor’s work.