What is the IR35 legislation?
HM Revenue and Customs (HMRC) introduced the ‘intermediaries’ legislation’, which became known as IR35, in the 2000 budget to combat “disguised employees”. The term refers to individuals using a limited company to provide their services, who pass the employment tests, and if, were it not for their limited company, they would otherwise be employed by their end client.
In the past, contractors were required to assess their status by going through their contracts and checking their working practices for signs of practices that indicated possible disguised employment.
Engaging contractors have saved end clients from paying over National Insurance and benefitted contractors who were able to maximise their tax efficiency, leaving the Treasury out of pocket.
The process of recovering the missing tax revenue started in 2017 with the Government shifting the responsibility of determining contractors’ status to organisations. First in the public sector, and then, in the private sector in April 2021.
From this date, medium and large businesses (and similar unincorporated bodies) hiring contractors have become liable to determine their off-payroll worker’s status.
How are you affected as a contractor?
Where does this leave the contractor? The initial panic of shifting responsibility started a trend of migrating contractors onto a safer umbrella payroll model, where IR35 doesn’t apply. This left both the end client and the contractor worse off, increasing the tax bill for both.
Thankfully, with the dust slowly settling, the industry has made considerable progress in implementing robust and fair practices in determining the status of contractors working through a personal service company.
The assessment process
Hiring organisations are now required to issue a Status Determination Statement (SDS) to each contractor. The statement has to confirm the decision and the reasoning behind it.
The purpose of the document is to mitigate the risk of non-compliant assessments such as role-based or blanket determinations, which we have seen plenty of at the beginning of 2020. As long as proper care is taken, hiring organisations may conduct reviews internally using the Government’s CEST tool or use a third party and outsource the entire process.
If a contract is deemed to be inside IR35 contractors may carry on using their limited companies or choose the services of a more tax-efficient umbrella PAYE arrangement.
The primary function of an umbrella company is to organise payment for fixed-term work undertaken by independent contractors. When signing up with an umbrella company, contractors become one of its employees acting as an intermediary between them and their agency, or directly the end client if no agency is involved.
The umbrella company provides a full employment package with statutory benefits, such as sick pay, maternity/paternity and holiday pay. Most insurance companies include Professional Indemnity and Employers/Public Liability as part of their employment package.
The option of continuing work through their personal service companies for contractors with existing companies are sometimes still there but dismissed due to cost and tax inefficiencies.
Trading inside IR35 through a limited company means that income from the contract is deemed as salary and taxed as such. Cost and added responsibilities of running a limited company only add to the list of disadvantages.
What to do with your existing company?
If you have to go the umbrella route but want to keep your company for contracts outside IR35, you may want to opt for a service that can look after your umbrella income and your limited company at the same time.
Working with our sister company SmartWork we offer this service for a fixed monthly fee of £95+VAT. It includes an umbrella service for your inside IR35 income and looking after your limited company so that it is ready for you to pick up the next outside IR35 contract. It is important to remember that despite the legislation changes, working outside IR35 and via a limited company is still the most tax-efficient way of trading.
An outside IR35 determination still carries the same benefits as before the reform and working via a personal service company (limited company) remains the most tax-efficient way of trading for a contractor.
We’ve detailed the benefits of a limited company arrangement in this article.
How can we help with your IR35 queries?
As a compliant accountancy practice, we feel that we have a duty of care to our clients when it comes to IR35, and keeping them updated with all legislation is a part of that commitment, so please follow us here or on our social media for the latest updates.
If you have any questions that this article has not answered, please look at these frequently asked questions.
For your IR35 review and insurance needs we’ve teamed up with IR35 specialists Qdos Contractor, who have the knowledge, and expertise to conduct a full contract review granting you complete peace of mind. They offer a 10% discount on their insurance deals for MyAccountant clients.
We are posting regular updates on our blog that can be followed via our LinkedIn page, but if you’d like to know more or need help with IR35, feel free to give us a call on 0800 917 9100 or e-mail email@example.com.