As a contractor, it’s important that you understand and comply with IR35 legislation. If your working arrangements fall within the IR35 criteria, this will affect your tax liability and National Insurance payments.
What is IR35?
IR35 also known as the “intermediaries legislation”, is in place to stop ‘disguised employment ‘and to ensure the correct taxes are applied.
The rules are relevant to anyone who works on a contractual basis for clients as a self-employed contractor, sole trader, freelancer or consultant. It also applies if you fulfil contracts via an intermediary such as an employment agency, your own limited company, personal service company or partnership.
Whose responsibility it is to determine whether you fall in or outside of IR35 is dependent on whether you are working within the public or private sector.
Determining whether IR35 applies to you
Private sector contractors
If you work in the private sector, HMRC says that you must work out your employment status for each contract you undertake by considering what that relationship would be if there wasn’t an intermediary involved. If your relationship is considered to be that of an employee / employer, then IR35 applies to you.
To help determine your status as to whether IR35 applies to a current contract our team of experts can undertake a review. A telephone consultation will assist in identifying whether any working practices within your contract could be considered disguised employment by HMRC.
Public sector contractors
From April 2017 IR35 status for contractors in the public sector will be determined by the client not you, the contractor. If the public sector client decides that IR35 should apply to the engagement, payments to the contractor’s company will be taxed at source – as if you were an employee.
Some public sector organisations will work with hundreds of contractors at any one time and will be unwilling or unable to make a detailed assessment of each engagement, so they may operate the new rules on all their engagements, regardless of their actual IR35 status.
Once you know your position you will be able to make an informed choice about whether you wish to fulfil the contract or renegotiate your terms. This will alleviate any worries you may have about paying the correct tax.
Supervision, Direction & Control
Much of the assessment around IR35 relates to the degree of direction, control and supervision involved in your role. For example, IR35 could apply if:
- you are instructed or required to perform the work in a particular way
- you manage your client’s staff and are involved in duties such as appraisals, disciplinary procedures or leave approval
- you have to request leave and are not free to choose what hours you work
- you use tools and equipment that belong to the client
- your client could terminate your contract with short notice.
Let’s take the example of a decorator.
If the decorator is commissioned to paint a wall in a particular colour, with no further involvement from their client, they are unlikely to be subject to IR35. However, if the decorator has to be on-site within set hours, is provided with equipment and told to start on the left-hand side of the wall and finish on the right, they will probably fall within IR35 rules as they are subject to a greater level of direction, control and supervision.
What’s the impact of IR35?
If you fall within the IR35 criteria, you will find that there is a significant impact on the amount of tax you pay.
IR35 would effectively mean you pay tax and National Insurance in the same way as a general employee, which means you will have to contribute more and your take home pay will be less. Importantly, while you may be taxed as a general employee, you would not be classed as an employee by the company your contract is with and therefore not entitled to general employee rights such as sick pay or benefits such as pension schemes.
Penalties for non-compliance
It is vital that you understand whether your working arrangements mean you are subject to IR35. HMRC can levy interest and penalties on any extra tax and National Insurance contributions that are owed, with more severe penalties if it’s proven that IR35 rules have been deliberately ignored.
Free, unlimited IR35 assessments
If you are not sure about your IR35 status, or want to find out more, please get in touch with a member of our team. If you register with Crest Plus, you will be offered free, unlimited IR35 assessments if they are relevant to you.