Categorised in: IR35,
If you are working as a self-employed contractor such as a consultant, freelancer or sole trader, then your work will fall within the IR35 regulation. If so it is crucial to understand what it is and how to follow IR35 compliance.
Intermediaries Legislation, more commonly known as IR35, came into effect during 2000 as a measure to counter tax avoidance schemes. The aim of IR35 is to prevent contract workers from creating limited companies so that they can work as employees of their own company, thereby saving on tax and national insurance payments. HMRC seeks to clamp down on this ‘disguised employee’ method and ensure that income taxes and national insurance payments are applied correctly and legally.
If you fall within IR35 then every contract that you enter will be assessed on an individual basis by the HMRC. A number of factors are taken into consideration to determine if you are working within IR35 compliance, and these must be considered separately for each contract per client. These factors are discussed below.
1. Direction supervision and Control (DSC)
Your contract should clearly state you have the control as the independent contractor, meaning that you are not supervised and you are in control of all aspects of the services you provide, such as providing your own equipment and deciding your own hours. It is important to prove that you are not treated as an employee of your clients company.
2. Mutuality of Obligation
MOO is an employment relationship term where the employer must provide regular work for their employees, and the employees agree to undertake this work. Whereas, as a contractor, once you have completed your services there is no expectation of continued work and your relationship ends. If work is expected consistently and continually then HMRC might decide that you have reached an employee level status due to mutuality of obligation. Therefore, to remain compliant MOO must not be present.
3. Financial Risk and Reality
As a contractor you are completely responsible for your own business and so you must take ownership of the financial realities, including investments and management of finances. A clear distinction is that employees are paid a fixed salary regardless of the company’s profits and losses whereas a contractor is exposed to financial risks, for example a contract ending unexpectedly early resulting in a reduced fee.
Additionally, HMRC can look into the method of payment from your client as an indicator of your compliance, this can cover negotiations of rate, invoicing and expenses.
As a contractor, being able to prove that you provide independent services is crucial to IR35 compliance. This can be done in a number of ways, initially by showing that you have control, that you provide your own services, bring your own equipment, and that your contracts reflect this. It can also be shown by proving that you undertake your own training, advertising, have your own insurance, have registered for VAT and have implemented other measures that are personal to you.
A contractor has the right to substitute his/her services with another individual.
6. Public sector and IR35
In 2017 the government modified the rules on off payroll payments and the responsibility for deciding on Direction supervision and control (DSC).
To increase compliance they moved accountability for the DSC decision from the contractor to the client.
As the risk now sits with the public sector body there has been a clear move towards compliance and reduced risks. Obviously an employer’s viewpoint and risk threshold is quite different to that of a contractor and there has been a significant shift towards deemed employment status under IR35 increasing revenues for HMRC.
7. Private sector and IR35
In April 2020 HMRC plans to roll out the same changes to the IR35 rules within the wider private sector, so the same ramifications will apply to businesses and contractors operating in that sector.
If there is deemed employment under IR35 then the client has responsibility to deduct a sum equivalent to Employers NI before payment is made to the contractor. Effectively mirroring a full employment cost.
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