Client Insight: What is IR35?
In partnership with Atom Accounting.
IR35 is a UK tax law that is designed to ensure that external contractors offering services to companies are subject to similar tax obligations as permanent in-house employees.
We sat down with Tom Buckley from Atom Accounting, to learn how IR35 could impact our clients.
What is IR35?
IR35 (now known as off payroll working) legislation was introduced in April 2000. It was introduced by HMRC to tackle disguised employment, where an individual would operate via an intermediary to avoid employed levels of tax and national insurance.
Historically, it has been the individuals/contractor’s responsibility to assess whether they were inside/outside IR35 until the recent off payroll changes in 2017/2021 for the public and private sectors, respectively.
The responsibility now sits with the end client that is requiring the services of an individual operating via an intermediary (their own limited company). The client will need to determine whether the worker would be regarded as an employee for tax purposes if they had been directly engaged.
How do you decide which side of IR35 your contractor sits on?
Being inside or outside IR35 depends on whether a contract is for services or employment.
Several factors are considered when assessing IR35. A few of the key factors in helping determine the IR35 status are below:
Substitution – Is the limited company who provides the worker to the end client able to send a substitute if he/she is not available?
Supervision/Direction & Control – Is the worker able to determine how and when they carry out the specific job without day-to-day guidance from the end-client?
Financial risk – Does the individual accept the financial risk as part of being in business i.e. if the work is not to a required standard, it is expected for the limited company to correct this and complete to the required standard?
Mutuality of obligation – Can the individual/limited company reject the work needing to be carried out?
Why is it important to decide if your contractor sits inside or outside of IR35?
The off payroll working changes introduced in 2017/2021 provide significant risk if not adhered to. The end-client must accurately assess whether the specific role is inside/outside IR35. If the end-client does not carry significant due diligence in making this assessment, they are subjecting their company to legal and financial risks where any tax liability could potentially sit with the end-client if not followed correctly.
Are there any exemptions from IR35?
If an individual is operating via a limited company for a “small” end-client, it is still the individual’s responsibility assess whether their role is inside/outside IR35.
For any medium-large sized businesses, it is the end-clients responsibility to ensure the off-payroll changes introduced are adhered to.
A business is classified as medium-large if they meet two of the following criteria:
· Net turnover exceeding £10.2m
· Balance sheet totalling more than £5.1m
· More than 50 employees
Does an umbrella company/limited company have any impact on the company?
An individual operating via an umbrella company is typically “inside” IR35. They are an employee of the umbrella company having the relevant levels of tax and national insurance deducted from their taxable pay.
An individual operating via a limited company is typically “outside” IR35.
An individual can still use their limited company for a contract that is inside IR35 via what is a called a “deemed payment” model.
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