The IR35 legislation was introduced in 2000 and determines how contractors and freelancers pay taxes.
What is IR35?
IR35 legislation was introduced by HMRC as a way to stop contractors and freelancers avoiding tax by operating through their own limited company. It was HMRC’s view that some contractors and freelancers were taking advantages of tax benefits that permanent employees were not entitled to. They also believed that some workers who were operating through a limited company were doing the same as permanent employees. IR35 was brought in to ensure contractors and freelancers were paying the correct tax.
How do I determine my status?
Due to legislation changes in April 2017, anyone working in the public sector cannot determine their own IR35 status and the end-client must make this decision. Most public sector contracts are inside IR35, and therefore, you will most likely be required to work through an umbrella company.
Currently, if you work in the private sector you are able to determine your own IR35 status and can pay yourself accordingly. However, this will change from April 2021 when changes to off-payroll in the private sector are introduced and private sector organisations will have to determine the IR35 status for all of their temporary workers on a contract-by-contract basis.
What factors determine an IR35 status?
There are three common factors which help to determine your IR35 status:
- Control and direction – the extent to which a client controls where, how and when a contractor performs their work. For a temporary worker to prove they are not under direct supervision or control of their client, the worker must prove (both in the written contract and whilst completing the work) that the client has no influence over how they complete the task.
- Personal service/substitution – the right to provide a substitute in the event of your absence has long been seen to demonstrate that a contract falls outside IR35. This is because a business provides its services to a client rather than the exclusive services of an individual. Therefore, a client should accept a substitute in an outside IR35 arrangement if the original contractor becomes unavailable.
- Mutuality of obligation – mutuality of obligation exists when a client hires a contractor to undertake a certain task – the contractor will provide their skills on the basis of the client paying them accordingly. No further work is expected upon completion of the contract. If a contract is regularly renewed or work is offered over a period of time it is seen that employment is created.
Does IR35 apply if you are working through an umbrella company?
IR35 does not apply to you if you are working through an umbrella company because you are seen as an employee of the umbrella company (for tax purposes) and will receive your salary through PAYE. The umbrella company will deduct the correct amount of tax and National Insurance Contributions – similarly to permanent employees.
Will I need to work through an umbrella company after April 2021?
It depends on whether or not your end client deems you to be inside or outside of IR35. However, it is expected that a lot of contractors in the private sector will be caught by IR35 and therefore will need to work through an umbrella company.
If in doubt, always seek the advice of a professional who is able to advise on your position and avoid a potential HMRC tax investigation for not abiding by the legislation.