IR35 is legislation that seeks to ensure that a freelance worker pays the correct amount of tax. It was created around 20 years ago to try to stop people who were in practice working like employees from setting up their own limited company or Personal Service Company (PSC) in order to pay less tax.
Many people choose to use a PSC for reasons other than tax, of course. For many, a PSC gives added credibility, and they enjoy protection from personal liability, unlike a sole trader.
However, IR35 has been designed to enable HMRC to unpick an arrangement that they feel is artificial, and where a PSC is being used for the wrong reason.
The new ‘off-payroll’ rules in the public sector, which are due to come into force in the
private sector in April 2020 are similar, this will be explained later on.
What are the IR35 rules?
An assignment which is subject to IR35 is described as ‘caught by IR35’ or ‘inside IR35’. If you are ‘caught’ then the income that would be paid to your company for the assignment is reduced by 5% to allow for the expenses of running a business, and the remainder is ‘grossed-down’ for employers NIC, and the remaining ‘gross pay’ equivalent is subject to PAYE tax and employee’s NIC, just like a normal payslip.
There are other possible deductions (such as an employee pension) in this calculation but you should discuss these with us as we can also help with other aspects of the calculation. By law these calculations have to be made by the PSC, and the PSC either pays the tax to HMRC each month, or makes an adjustment at the end of the tax year (around 5 April) to do the same calculation and make the same payment, but on an annual basis.
How do you know if you’re ‘caught’?
To decide if an assignment is ‘caught’, we need to examine both the contracts in the supply chain and the actual working practices. This will indicate whether this looks like an employee/employer relationship, in which case it would be considered ‘caught’ by IR35. If it’s considered a business-to-business relationship, then it would not be ‘caught’ by IR35. Part of the issue comes down to whether your role is subject to Supervision, Direction and Control. If it is, and you have little autonomy in the role, then it’s likely that the assignment would be considered ‘caught’.
There are lots of considerations, including:
- Mutuality of obligation (‘MoO’) – this is the principle that an employer and employee are obligated to each other. If the employer is obliged to supply continuing opportunity to work or to pay a notice period if no work is available; and if you as the contractor are obliged to serve a notice period. If there are not obligations on both sides, then there is ‘no MoO’ and you would be subject to IR35. Read more about MoO here. https://www.crestplus.com/2018/08/will-affected-ir35-changes/
- Right to substitution– the organisation requesting the assignment can make only reasonable demands regarding a substitute, such as a particular trade credential or level of experience, and not reject a substitute out of hand. If you can offer a substitute for your role, then your assignment would be considered ‘outside IR35’.
- Supervision, direction & control. To be ‘outside’ IR35, a worker should not be controlled in how they deliver the assignment.
- Financial risk – if the worker could suffer financial loss then that would be another indicator that they are not subject to IR35. Do they need insurance? If work is not completed satisfactorily, will they have to put it right, without charging or being paid for those corrections?
- Behaving like an employee – if the worker behaves like an employee, if they’re on the holiday rota or use a lot of end user equipment, for example, then they could be considered ‘caught’ by IR35.
What does this mean for you?
It’s critical that you ensure you know if an assignment is inside or outside IR35 when you take on the work – we can help with that by taking you through our Contractor Assessment.
If you undertake an assignment which is ‘inside IR35’ as a PSC, then you will need to calculate the amount of tax you must pay. If your assignment is ‘caught’ but you do not apply the tax rules then HMRC will seek to collect the tax due along with interest and penalties. We are able to help you review your contract and working practices, and provide an illustration of your take-home pay so you can decide the right approach before beginning an assignment.
A note on the off-payroll rules
Off-payroll rules were introduced to the public sector in April 2017.
They mean that the end user is responsible for deciding if the assignment is ‘caught’. Whoever pays the PSC (the end user, or an intermediary such as an agency) is liable for the payroll taxes.
New, similar rules are due to apply in the private sector from April 2020.
Using our Umbrella employment solution
If all the assignments you are carrying out are caught by IR35 or the off-payroll rules, then you may need to consider other working options.
An Umbrella company could be a good alternative.
While Umbrella workers are taxed like regular employees, they do offer the benefit of statutory employment rights like sick pay, holiday pay and entitlement to a company pension scheme. FCSA accredited members, like Crest Plus, are tested regularly so you can have the peace of mind to know you are working compliantly when using our Umbrella employment service. Find out more.
Working through a Limited Company (PSC)
A Limited Company (or Personal Service Company as they are sometimes referred to) is often the most tax efficient and therefore financially rewarding way to work.
In choosing this route, you’ll likely become a company director and will therefore need to assume additional responsibilities including the submission of annual accounts to Companies House and tax returns to HMRC. You would engage an accountant such as Crest Plus Accounting, so being safe in the knowledge that your company and personal financial obligations are met.
If you work in the construction industry you are likely to be required to operate under the Construction Industry Scheme (CIS). Under this scheme your tax will be deducted at source unless you have gross status.
When choosing to carry out work as a subcontractor for Crest Plus you company would need to purchase the relevant insurance provision for the type of work carried out. Crest Plus partners with specialists in offering this type of insurance cover. Find out more about contracting through your own limited company.