** UPDATE: IR35 has been DELAYED until April 2021 **
Do you provide personal services to an end client through an LTD?
If your answer is 'yes' you will need to ensure you act in a way which doesn't look to HMRC like an employer/employee relationship, because the amount you pay in tax differs. Your tax must accurately reflect your employment status.
These rules are enforced by HMRC through 'IR35', also known as Intermediaries Legislation. An intermediary is any entity that sits between the end client and the worker, such as the agency or limited company.
IR35 was called to life due to non-compliance with HMRC tax principles by a wide range of service providers. Through an LTD one was able to split any Income Tax and National Insurance Contributions due between a low salary and high dividends, thereby securing a higher take home pay than an employee.
If IR35 applies to you or you are 'inside IR35' it means if you were employed directly rather than contracted through a limited company you would pay the same Income Tax and National Insurance Contributions.
It is important to be able to differentiate and apply the right category because HMRC has the right to calculate your Income Tax and NICs from prior years and request you to pay the difference.
This article is to avoid such a difficult situation in the future and help you to expand your business without unnecessary stress and fear of non-compliance.
WHY IS IR35 SO IMPORTANT?
IR35 regulations exist to determine whether the relationship between you as a worker and the end client would be seen by HMRC as an employer-employee relationship in case the agency you work for (and/or your LTD) wasn't in place. Is short: IR35 streamlines if you are rather an employee of the client than a limited company providing contracted services to that client.
A COUPLE OF TERMS IMPORTANT TO KNOW
Personal Service Company
A company that sells the work or services of an individual (or group of individuals) that is owned and operated by that individual (or group of individuals).
The entity that sits between the end client and the worker, such as the agency or limited company.
EMPLOYEE OR CONTRACTOR?
There are a variety of factors you need to know in order to reliably establish your employment status.
The point is you shouldn't be in a position of virtually acting like an employee of the end client rather than their contractor.
To determine your status you have to:
- Look at the terms of your contract
- as well as your actual working practices
from the 6th of April, 2020 it is the end client's duty to declare whether you are inside IR35 or you actually act like a contractor.
The first question you need to ask yourself on the subject is whether your work is controlled and directed by you, or if you are subject to an employer/employee relationship.
INFLUENCING FACTORS ON YOUR IR35 STATUS
Based on actual experience HMRC will look 'behind' the contract and at the actual working practices being followed. In case you are hesitant, seed professional advice. Evlateam's professional advisers can point you in the right direction.
The key principles that will help to establish your IR35 status are:
What degree of control does your client have over what, how, when and where you complete the work?
As a contractor you will definitely need to have a comprehensive job specification which should outline
- the services to be provided
- agreed location of work
- the hours in each day over which
- the services are provided.
There are cases when the contract binds you to submit guidance, appraisal or monitoring to the management. Such duties would indicate that you are rather an employee than a contractor.
Are you required to carry out the work yourself? Can you send someone else on their behalf?
In case you have to provide your services, this usually indicates that you’re an employee. A contractor has the right to send a substitute to complete the work in his place, or even to reassign the work. Thus the right to send a substitute must be absolute and not restricted to such an extent that you have to perform the work yourself.
As a contractor, there must not be any mutual obligation. There are three obligations to consider:
- Does the contract oblige your client to offer you work throughout the contract period?
- Are you obliged to complete a notice period, that would be of similar length to if you were an employee?
- Is there an obligation on the end client to accept the work you offer?
As a contractor you work on a project to project basis, there must not be any obligation to work for the same client after the project has been completed. You should have rights to terminate the project half way through.
Financial records: As a contractor you receive payment when the project is completed as opposed to an employee who will usually be paid at regular intervals.
Alternative work: If your contract binds you to have only one client at a time, you’re probably an employee, not a contractor.
Equipment: You should be using your own equipment, rather than equipment supplied by your client. There could be exceptions when there’s a sound reason (such as for safety, security or practicality).
Corporate involvement: As a contractor you should not have any involvement at all with your client’s corporate structure. This applies to even the smallest involvement, such as whether you have a security pass to your client’s building.
Blacklists: Check to see whether your client has had any IR35 problems in the past.
IR35 IN THE PUBLIC SECTOR
In the public sector, responsibility for determining your IR35 status lies with the end client (or agency) who pays your limited company. If your contract is inside IR35, this same end client (or agency) will pay Income Tax and NICs (employer’s and employee’s) to HMRC. Should there be any mistake your client or agency must pay the difference to HMRC and send an official reminder to your LTD.
IR35 IN THE PRIVATE SECTOR
The IR35 rules will be extended to the private sector from the 6th of April 2020 onwards, directly affecting a large number of contractors. Under these new rules the end-client is responsible for determining the employment status of contractors. Now the fee-payer in the contractual chain (often a recruitment agency, or client) is responsible for deducting income tax and National Insurance Contributions from the contractor. If you are VAT registered, the VAT element should be excluded from the tax calculation.
We hope this article helped you to clarify the subject.
If you are still uncertain, look for the next article: „IR35 Frequently Asked Questions” and/or seek our professional advice. Our contacts are as below.