What is IR35 and Is your contract affected by it?
What does IR35 mean?
Before we begin, you may be wondering what IR35 means. IR35 is not a new tax. Instead, IR35 is a piece of a government law that was put in place to prevent disguised employment, which is when someone enjoys the tax benefits of being self-employed but does not take any of the risks that come with doing so.
IR35, the Intermediaries Legislation, commonly known as the off-payroll working rules, was introduced in 2000. The law became known as his IR35 since the news release that first announced it was named Inland Revenue Service Budget Press Release No. 35. The rule’s goal is to guarantee that contractors who work with “intermediaries” (often private service companies) pay about the exact amounts in income tax and National Insurance Contribution (NIC) as workers of a similar calibre.
According to HMRC, approximately 90% of private sector contractors are actually “disguised workers” who identify themselves as “self-employed.” As a result, the taxes that a self-employed person and an employee may pay might vary significantly.
What does it imply to be considered to be inside IR35?
First, it’s important to define precisely what it means to be inside IR35. Principally, being inside IR35 implies that the work or service you do is seen by HM Revenue and Customs (HMRC ) as more akin to an employment service than a self-employment one.
If you fall under IR35, HMRC will treat you as an employee for tax reasons, which means you’ll probably wind up paying more in taxes than you would if you were a contractor.
What factors define your IR35 status?
Several factors, some of which are described below, are considered to determine the IR35 status of a contract.
1. The Nature of Your Work
The most crucial thing to remember is that the work outlined in your contract must correspond to the job you are performing since you are legally required to provide the service specified in the contract. The task defined in an IR35-friendly contract will have a closing date, such as finishing a particular project. The common consensus is that ongoing work is not IR35-friendly.
2. Supervision, Direction and Control
An assignment may fall under IR35 if it meets the “employment” criteria of supervision, direction, and control.
“Supervision” refers to how closely your customer monitors your job and how you complete it to their standards.
“Direction” refers to your customer giving you instructions, suggestions, and recommendations on how to perform your project. Often, someone giving instructions will also coordinate how the task is done as it is being done.
A job may fall under IR35 if it fails the supervision, direction, and control tests for ’employment’.
“Control” refers to a situation in which someone is directing your job and method of execution. The capability to switch between tasks when priorities shift is also included in this.
3. Mutuality of Obligation
An employer-employee relationship is an example of mutuality of obligation since the employee expects the employer to supply continual work and the employer fully expects the employee to perform work on an ongoing basis. Therefore, contracts that are IR35-compliant should not include any term that suggests or requires either party to perform or finish work continuously.
Simply put, a contractor does not commit to continuing working for the customer when the job is finished and must move from project to project. Additionally, a contractor has the authority to end a contract early. As opposed to a contractor, an employee is bound to continue working even after their responsibilities are finished for a single employer.
Suppose the contract compels you to accept whatever work the client assigns you, stipulates exclusivity, and mandates that you consistently perform a set number of hours per week at a fixed rate. In that case, the contract likely falls within the IR35 tax bracket.
4. Financial Risks
By accepting a contract, a contractor operating outside IR35 often assumes some financial risk. This can be the price of purchasing new machinery, paying for training, or purchasing professional indemnity insurance that covers the duration of the contract.
5. Termination of Contract
A typical contract outside of IR35 will indicate that the contractor is there to offer a specific service or project, and upon completion, the contract will close.
6. Intentions of the Parties
The intent of both the customer and the contractor should be to stay as two completely different parties, and this should be mentioned in the contract. If the contractor is actually outside of IR35, then it is their purpose not to have an employee and employer relationship with their customer. Consequently, the contractor is not obligated to any of the rewards that employees receive, such as attending staff events and using staff facilities.
