IR35 – HMRC’s tax legislation changes and what you need to know

posted on November 27, 2019in the Blog Category

IR35 – HMRC’s tax legislation changes and what you need to know

Off-payroll employment has been a long-standing bone of contention for HMRC.  How to properly and fairly tax a worker who provides their services to a client through an intermediary, but for all intents and purposes works full-time for that client, which the loophole IR35 sought to close.  Depending on who you speak to, the rules have either been fairly well executed, or have done nothing but add more complexity to an already elaborate process.

Varying opinions notwithstanding, IR35 is about to undergo a facelift and on April 6th, 2020, there’s going to be changes.

IR35 rules 

In the public sector, the client must decide your employment status.

In the private sector, you must decide your worker’s status.

This can be done by showing that there is no employment relationship, you have to prove a certain relationship criteria to determine whether you are ‘inside’ or ‘outside’ IR35.  You need to keep three things in mind when deciding if your business falls inside or outside of IR35:

1.  Mutual obligation

Working as a self-employed contractor means you can work in a project-by-project basis without any obligation to continue working for that client once the contract comes to an end.

If a client is obliged to offer you paid work and you’re obliged to take it, this is an example of a contract of employment, meaning you fall within IR35.  Also, if a contract states that you can’t take on other clients while working for them, this also places you within IR35.

2.  Substitution

If a contract states that the client wants you, and only you, to see a job through from start to finish, then this working relationship will fall within IR35 rules.

3.  Supervision, direction, control

You must have control over how you complete the work for a contract to fall outside of IR35.  If a contract sets working patterns and the client provides excessive input over how work is completed, then it’s likely that this will fall under employment rather than contract work.

If you pass the test, you are ‘outside’ of the IR35 rules, and can continue to invoice then pay yourself through your own limited company.  If you are deemed ‘inside’ IR35 and HMRC declares that it’s an employment relationship, then tax and National Insurance will be deducted from your earnings and the liability for any missing tax lies with you.

Check your employment status

Here are some of the factors that HMRC will take into consideration.

How you’re paid

To stay outside of IR35, self-employed contract workers tend to be paid on a project-by-project basis, which is usually when work reaches a specific milestone or comes to an end.

Running a business of your own accord

Having a website, dedicated office space and employees all goes in your favour of showing that you’re running your business of your own accord.  This reinforces that you’re operating as a self-employed contractor and not offering the services you provide as an employee.

The equipment you use

Using your own equipment to complete a contract not that of your clients, as this could result in HMRC viewing you as a disguised employee.  Always make it clear that you’ll be using your own equipment while working to remain outside of IR35, otherwise it could make working out your employment status more difficult.

Exclusivity

One of the major perks of being a self-employed contractor is that you can work for more than one client at once.  However, if you’re deemed to be working over a prolonged period of time for one client, HMRC could view this as an employee-employer relationship, meaning you fall within IR35.

Financial risk

Self-employed contractors are likelier to experience a higher level of financial risk than an employee would as they have to invest their money into the everyday running of their business.

How to prepare for IR35

1.  Assess your current working practices, do you fall ‘inside’ or ‘outside’ IR35.

2.  Think about how IR35 changes could affect how you do business and what you can do to help solve potential problems.

3.  Seek expert advice, before changing how you conduct business, get advice to make sure any changes you make are still compliant with IR35 and other laws.

AvatarWritten By: Mandi Mottershead

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