IR35: what you need to know
For the benefit of our clients, workers and intermediaries, we have put together a comprehensive guide to the IR35 off-payroll legislation.
What is IR35
First introduced in April 2000, the IR35 legislation is also known as the ‘Intermediaries Legislation’. It has been designed to identify contractors and businesses who are avoiding paying the correct taxes by operating as ‘disguised’ workers, or who are businesses engaging workers on a self-employed basis to ‘disguise’ the true employment status of that worker.
Inside Vs Outside
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What does “inside IR35” mean?
When deemed to be operating 'inside IR35' it means that, under the IR35 legislation, you must pay the same tax as an employee of the company you are providing services for. It could also mean that you’re entitled to the same rights and benefits as an employee/worker (e.g. minimum wage, maternity pay, protection from discrimination).
When working inside IR35, you’ll usually have to pay a ‘deemed payment’ of income tax at the end of the tax year to account for any tax deductions or NIC that an employee performing the same role as you would have paid.
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What does “outside IR35” mean?
To be operating 'outside IR35' means you are operating as a genuine business and delivering services to an end client with the risks and liabilities that come with your operations. You are also able to work on multiple projects with different clients.
When determined to be outside, you pay yourself a salary and withdraw further income as dividends (which are not subject to NIC) through your limited company. Your limited company pays tax only on its profits at the corporate 20 per cent rate.
What the new IR35 rules mean for businesses
As of April 2021, public and private sector businesses engaging contractors will be responsible for assessing and determining the employment status of the individual and disclosing whether they are inside or outside of IR35 to the HMRC.
If the work is determined to be inside IR35, the business, agency or third party that pays the contractor’s limited company for services will become the ‘fee payer’ and will be responsible for deducting all taxes including income tax, employee NICs and pay employer NICs to HMRC.
The new rules will not apply to the small businesses that have an annual turnover below £10.2 million, a balance sheet total less than £5.1 million and less than 50 employees.
Determining factors for being outside of IR35
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Control
Is the worker free to conduct the contracted services as they desire without a line manager or set hours?
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Monetary risk
Is there a personal financial risk incurred as a result of the workers duties?
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Substitution
Is there a clause in the contract of services that allows the worker to allow someone else appointed by the worker to cover the duties for that day?
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Provision of equipment
Will the worker need to provide their own equipment? This can sometimes be difficult as some clients will ask for their own equipment to be used for security reasons.
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The right of dismissal
Does the worker have a fixed notice period or fixed termination period?
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Employee benefits
Is the worker receiving any benefits that permanent employees have access to? For example, training, sick pay, pension contribution or holiday pay?
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