IR35: What is IR35? IR35 Explained Easily!
IR35 is a name which is currently one of the most talked about tax rules in the private sector. But before you read about what the ruling is and its affects, let’s first find out – what is IR35?
The IR35 tax reform is an increased tax rule by HMRC which directly impacts people who are independent contractors, freelancers or simply, self-employed people. So, if what you do as a profession doesn’t meet the standard self-employment definition of HMRC then you will be affected by IR35 for the tax year.
Simply said, IR35 rule will cause an increase in the tax and NI for self-employed people or contract workers and limit the growth of their profits.
Workers, in any sector, who are within the IR35 reform will need to schedule E taxation and National Insurance (NI). They will be able to deduct expenses for personal service before doing so. As a result, the income itself will be treated as an expense. So, depending on your tax agency, there can be a mixture of both IR35 and non-IR35 for tax advantages.
The following are some of the personal service expenses which can be claimed in addition to the standard 5% allowance:
- Pension payments
- Business travel expenses
- Accommodation expenses such as food, living, etc. when away from home
- Professional Indemnity cover
- Medical or other benefits such as private medical insurance
Interestingly, self-development courses, training expenses, or otherwise coaching costs do not fall under this allowance. No matter to what extent of details regarding IR35 we get into, it is still most recommended by us to consult legal advice for your particular situation.
If found to be under the scanner of IR35, you will need to change your working practices to make adjustments to abide by IR35 rules.
Are you an independent contractor, freelancer or self-employed?
One of the first things to establish before finding out all the details of IR35 and its rulings is for you to check employment status. Whether or not you consider yourself employed under an employee or consider yourself to be self-employed, is not the point. What matters is what type your employment falls under the definition of the HMRC’s terms.
HMRC determining under their guidelines is crucial and you will have to revise your work contract to reflect if any changes are needed. So, check employment status based upon HMRC guidelines!
If you are a contractor, it is of course the best or most advantageous to satisfy as many of the requirements to be qualified under HMRC’s self-employment status. You will be stronger position with IR35 if you are self-employed, so it is ideal to change your working style accordingly.
Are you looking for a way to beat the heat from IR35 tax reform?
Be in an employment type or service company which without a shadow of doubt qualifies under the HMRC definition of self-employment. In doing so, you will then prepare an IR35 friendly contract and abide by the working style, rules and IR regulations.
Get out of here!
Yes, leave for the exciting heat of other climates in various parts of the world. You will of course have to abide by their individual tax regulations. But you can always find a more relaxed taxing country elsewhere.
You will also benefit from other aspects such as lower living costs, less pollution, more savings, more vacations, etc. The UK continues to be stricter with taxing every year and the situation is not too bad elsewhere. Regardless of what you decide to do, be sure to go for a consultation with an IR tax specialist before heading out of the UK and into another country.
It is true that contracting is an independent way of life!
If you enjoy it, you will not want to be restricted by another employee or any other contracts from a service company. But if you are uncertain about contracting as a way of life, then look for permanent employment in a service company you like. As a contracted permanent employee, you will not have to face any of the issues with IR35.
This is the way for you if you want a more secure, stable and tax hassle free life.
Ignoring the IR35 tax reform is a bad idea!
Whether the tax ruling will be passed or revoked, whether it will be applicable to you or not, etc. Do not leave it to chance as to what will happen. We strongly recommend against the approach of simply ignoring or waiting and seeing what happens with it.
IR35 is in the simplest sense of the word a law. All the rules, conditions, etc. must be abided and you must be prepared to take on this financial burden. Seek advice, IR tax consultation and solution, don’t wait for it turn into a problem which cannot be solved.
Is there a way to know if you are violating IR35 rules?
As it must have been made clear from what you have been reading so far, IR35 will affect anyone and everyone who do not qualify under the self-employment definition of HMRC. It has been constructed by the HMRC to crackdown on employees who have been trying to unfairly claim self-employment benefits.
The IR35 tax reform is designed to fight the pre-existing weaknesses of the self-employment taxes. As a result, self employed workers will be held liable for the increased risks and responsibilities of contract work.
Working Through an Intermediary
If you are someone who is working at a place of employment through another company or partnership under circumstances which would fulfil the norms of employment, then IR35 will apply.
Of course, you will be subject to assessment under the rules and IR regulations. But if the terms of your employment do not point towards self-employment, then you will be caught in violation of IR35.
The IR35 legislation will increase two things – your Tax and National Insurance (NIC) due to the HM Revenue & Customs. The Government is concerned that a number of limited companies disguise themselves and normal employment under some sort of relevant engagement to benefit from self-employment tax benefits. So, this will serve as the check which will make sure that any individual who is working normal employment terms or providing services and is not treated as self-employed, the IR35 rules will apply to such individuals or workers to stop unfair tax relief.
The simple and most proven method is to determine the employment type of an individual. In this way, a contractor who works in similar pattern to an employee regularly must be appropriately reflected in the contract.
The HMRC will challenge many contracts and employers with the following common yet ineffective arguments:
- The contract is not one which is “LIVE” or “active”
- The contract is a standard off the shelf document and is not reflective of the exact working circumstances
- The contract has not been submitted to the Revenue for confirmation, etc.
The Revenue department will easily deem the fact that a contract is not the true reflection of the working style. This in itself is a violation. A common misconception is that if a majority of the qualification factors of an individual are towards self-employment or employment then that is the employment type. This is popular yet wrong!
What Are Some of the Factors to Consider for IR35 Compliance?
The IR35 rules, regulations, and legal framework will consider the whole environment of an individual and their employment but the following are some of the factors to consider:
- Type of the client’s business?
- The presence of a contract?
- Is the individual under any financial risk in the project?
- Is the individual working for only one client?
- Does the contractor work by using own materials?
- Is the contractor liable to correct errors in work from own expense?
- Can replacement workers be provided?
- If the client organisation considers the contractor to be a segment of their own company?
- Are there achievable and set deliverables and milestones?
- The intention of the employment type?
- The length of the work contract?
- Terms of the contract?
- How is the pay structure?
- Any benefits provided while working?
It must be understood that every case is unique and must be dealt with individually!
The important thing to note is that this blog is designed to give you an overall idea of the IR35 tax reform and how it may impact you. So, regardless of what is said to explain it, it doesn’t represent legal advice. For example, the HMRC has 80 questions in their questionnaire to determine which factors to consider. One of the primary things is to check employment contract for your employment rights and get professional assessment.
Do not leave it to HMRC to find you and check your contract of service as it will be costly!
The following people do not need to worry about being under the influence of IR35:
The way that the legislation is written means that it tries to target a certain group of individuals, these individuals were defined as intermediaries.
If you are working for your self then all costs and tax should go through the Self Assessment Tax Return. This will then be assessed for Income Tax and National Insurance, just make sure you keep a balance sheet to see where you are.
Contracting through and umbrella company:
If you have chosen to work with an umbrella company then you are classed as an employee of that umbrella company. Therefore, you are subject to PAYE on your income through the umbrella company.
An employee that is on payroll at an organisation:
If you are on a fixed term contract then all of your tax liability is taken through the PAYE basis before you even receive your income.
An employee in general:
If you work at any company as an employee and not a contractor then you don’t need to worry yourself at all as this article is about personal service and you have no need to worry, your employer usually does everything for you.
As previously stated, IR35 only applies to working individuals that are deemed as an “intermediary”. Sufficed to say this means if you a working in a limited liability partnership (LLP) or a limited company that is called as a Personal Service Company then you must be IR35 compliant.
What you need to understand is that IR35 doesn’t apply to individuals that are in these categories above or companies in general. This only applies to certain contracts that the individual has signed. So, with this in mind you need to check your employment contract right now if you think that you are under IR regulations.
With each new role that you might end up taking within IR35 you should take an assessment to see your employment rights via the contract terms and how much allowance you could be allocated extra the following year.
The HMRC states the following about determining IR35 compliance:
“In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person’s work activity. This is not a mechanical exercise of running through items on a checklist to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole. It is a matter of evaluation of the overall effect, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another. The process involves painting a picture in each individual case.”
How much of an impact would the IR35 potentially have on you?
So, here is how it works. If you have a working role that you believe is inside IR35 then your payment is deemed as a direct payment by your employer. HMRC then class it as a salary payment for the individual completing work and should be taxed as such. However, there is a difference in practice by both public and private sectors.
As a contractor, you should have in mind everything from the tax year, tax advantages of being outside the IR35 and the pension contributions.
So, how costly is it if you fail the IR35 test by HMRC?
There is not a clear answer to this question. This is because it will vary based on the exact terms of your contract of service and the rate, liability and risk during contractor services.
But in general terms, there will be a lot of added cost to you in terms of national Insurance contributions. To calculate exactly how this would affect you, use our IR35 calculator!
Where can you go for legal advice, professional opinion in order to pass IR35?
The easiest way is to find a responsible contractor expert from all the advertised professionals out there. The HMRC advise against the use of contract opinion service and strongly recommend professional guidance.
Hope this blog was able to help you understand IR35, what IR35 means and who it affects. If you are suffering from indecision, then consult a professional for IR tax advice today!
A Quick Update to the Blog:
We have covered what IR35 is, how it works and what it is used for. Let’s just recap what we covered in this blog and dig into a little bit of the history of the rollout of the IR35.
IR35 is the shortened name given, the full name is the Intermediaries Legislation. This piece of legislation was introduced in almost two decades ago in April 2000. The point behind this legislation was to stop workers who were fraudulently claiming money as contractors. For certain tax benefits, they were disguising themselves as “hidden employees”.
Sufficed to say if you are a contractor now you need to make sure that you that you are IR35 compliant in the private sector, otherwise you or the organisation your work for will be taken to court.
The reasoning behind this legislation was to stop an epidemic of employees leaving their current jobs to do the same job as a self-employed contractor, because at the time back in the late 90’s this was the “in” thing and had many tax benefits of doing so.
Therefore, the private sector and many businesses were at risk of losing many employees. Now there are many ways to check employment status of a contractor and also the contractor services they provide.
Unfortunately, for most people this means that they can no longer take advantage of corporate tax rates which reduce their personal taxes in the sector.
Another impracticality is that HMRC doesn’t exactly make it easy when they try to distinguish between contractors and employees. There are a variety of questions that need to be asked to attain your self-employed people status. Some of which we have covered earlier.
This hasn’t exactly become easier since the beginning of this legislation either, probably due to the fact that there is so much to read in a contract these days that you could spend an entire evening trying to grasp your contract of service.
Never mind the IR tax itself!