IR35: Frequently Asked Questions
As a communications, digital and marketing recruitment agency operating within the contractor market, we are having conversations on a daily basis with both contractors and clients regarding IR35. It is our ambition to make the transition as smooth as possible for our contractors and clients alike by sharing our knowledge on the upcoming changes and assisting all parties in navigating their way through any challenges that this may present.
What is IR35?
IR35 (also known as off-payroll working) is not a new piece of legislation and was initially introduced in April 2000. The purpose of the legislation is to ensure that any contractors operating in the same way as a permanent employee are being appropriately taxed, as well as the clients that are “employing” them.
Historically, it has always been down to the contractor themselves to make an assessment of their position and determine whether they are inside or outside of scope of IR35. However, in April 2017 the rules changed for the Public Sector, with the responsibility for determination (and the penalties for incorrect determinations) falling to the client rather than the contractor themselves. In October 2018, the Chancellor of the Exchequer announced in his Autumn Budget that IR35 changes would be extended to the Private Sector effective from 6th April 2020.
On 17th March 2020, Steve Barclay, chief secretary to the Treasury, announced that the legislation will be postponed until 6th April 2021. This is to combat the adverse economic impact of COVID-19. He stated:
"This is a deferral in response to the ongoing spread of COVID-19 to help businesses and individuals. This is a deferral, not a cancellation and the government remains committed to reintroducing this policy to ensure people working like employees but through their own limited company pay broadly the same tax as those employed directly."
Who is affected by IR35?
All contractors operating through a UK limited company are required to have an IR35 assessment for each role they take, irrespective of the location of work for any services provided after 6th April 2021.
If an assessment is made and the contractor is deemed to be outside of scope of IR35 for a specific role, then they can continue to operate in the same way as they have previously and IR35 will not impact them. However, it is important to reassess the role in question should the working arrangements change during the contract.
If an assessment is made and the contractor is deemed to be inside of scope of IR35, then for that engagement, the contractor will pay tax at source which will be deducted by the fee-payer (usually the recruitment agency or the client if they are engaged directly). There are three options as to how the contractor can operate should they be inside of scope for IR35. These are either through their Personal Service Company (PSC) as a “deemed employee”, through an umbrella company or they can operate as a PAYE worker. However, each of these options will have a significant impact on take home pay, reducing the workers net income by approximately 25%.
How can I complete an IR35 assessment?
Although it is now the clients’ responsibility to assess all workers providing service to them through a limited company, we would always advise all contractors to complete their own due diligence and create their own viewpoint on their IR35 status, with the support of the recruitment agency they are contracting through.
There are many ways to complete an IR35 assessment, many of which are free of charge. The most common way to make an assessment is using the free online tools that are available, including HMRC’s own tool, Check Employment Status for Tax (CEST). The CEST tool has had mixed feedback, but has the benefit of HMRC confirming that as long as the tool has been completed correctly and the answers provided are accurate, they will stand by the result of the test. Many other companies have created their own tools based on case law; however, they do not have the same backing from HMRC.
In addition to this, there are several third-party companies that will offer paid-for assessments. These assessments come with detailed descriptions of why a role is inside or outside of scope and generally also comes with an insurance policy attached to it, which indemnifies the client against any penalties that should arise if HMRC determines the assessment as incorrect. These assessments are helpful when challenging an assessment that you, as a contractor, feel is incorrect. However, they will not assist you in becoming outside of scope if your role does not warrant this response. Therefore, these tests are best used when there is a disagreement with the end client regarding the assessment, and a free test has already been completed and has confirmed that you are indeed outside of scope for IR35.
What can I do if I disagree with the determination given to me by my client?
In the draft legislation the Government have confirmed that there will be a “client-led status disagreement process” which all clients will be obliged to provide. This process will be open to both contractors and recruitment agencies. All requests sent to the client must be responded to within 45 days during which time the client must confirm either that their assessment is correct (and provide detailed reasoning for this) or provide a new status determination in place of the original assessment. During the dispute process the original determination stands.
We expect there will be further details confirmed as to how this process will work when the legislation is finalised.
Are HMRC going to investigate previous engagements if my IR35 status changes from 6th April 2021?
HMRC have confirmed that they do not intend to make retrospective reviews of historic working arrangements post April 2021. Therefore, contractors should not be concerned if their status is changing from April 2021. The most important thing is to ensure that the legislation is being correctly applied moving forward. However, if HMRC have reason to suspect that fraudulent or criminal activity has taken place then they will pursue an investigation. It is also important, should you choose to go down the umbrella company route, that you select a fully compliant umbrella company (we recommend FCSA accredited umbrella companies). If a non-compliant umbrella company is used, this may trigger a further investigation into historic arrangements.
Should I work through my limited company or an umbrella company going forward?
If you are determined to be inside scope of IR35 there are three options available to you, as discussed above. These are to operate through your limited company as a “deemed employee”, to work through an umbrella company or to be paid as a PAYE worker. The option that you select will depend on your own circumstances and preferences and there are pros and cons to each option.
If you choose to continue to operate through your own limited company as a “deemed employee”, your fee-payer will have to make the relevant payroll deductions e.g. PAYE and National Insurance from your pay. However, no employee rights apply, and you would not be entitled to employee benefits such as pension contributions, sick pay, holiday pay etc.
If you opt to work through an umbrella company you become a direct employee of the umbrella company and gain employment rights such as pension, sick pay, holiday pay etc. The umbrella company would become responsible for processing your payments to you and deducting appropriate payroll taxes. If you work through an umbrella company you gain a continuous record of employment, regardless of whether you work on multiple projects with different clients or have gaps between roles, which can be beneficial when applying for mortgages or other financial agreements.
If you decide to operate as a PAYE worker (if your agency offers this) then your recruitment agency contracts directly with you as the worker and provides you with worker rights. Again, the agency would then be responsible for ensuring that all relevant payroll taxes were deducted from the worker at source.
If a contract is determined to be outside of scope of IR35 there are clear benefits to working through your limited company, as you will not be required to pay tax at source and therefore your take home pay will improve. However, if you are working on contracts that are inside of scope of IR35 you will need to consider each of the options available to you and determine which is the best fit for you. It may be that you use a different option for different roles depending on the IR35 status determination for each position. Your recruitment agency should be able to provide help and guidance on this.
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