What does inside IR35 mean?

What does inside IR35 mean?

To be operating ‘inside IR35’ means that, under the IR35 legislation, you must pay the same tax as an employee. This could also mean that you are entitled to additional rights as an employee or worker (e.g. minimum wage, maternity pay, protection from discrimination).

If you’re found to be working inside IR35, you will usually have to pay a ‘deemed payment’ of income tax at the end of the year to account for any tax deductions as part of your year end package and ask clients to approve this.

The IR35 rules will result in an increased tax and N.I. liability and will prevent contractor companies from retaining profits to grow their business in the future.

Those contractors who fall under the IR35 rules will be liable to Schedule E taxation and National Insurance (N.I), following deductions for expenses, income will be in the form of a ‘deemed payment’, following these deductions.

Normal expenses may still be claimed. In addition, there is a provision for other intermediart expenses of 5% of a contractor’s turnover.

Pension payments – either personal or executive schemes.

Business travel – incurred in the course of business duties.

Subsistence – accomodation, meals when away from home.

Professional Indemnity cover.

Am I outside IR35?

You are outside IR35 if:

  • The contact is with the Ltd company
  • You have a substitution clause
  • There is no mutual obligation
  • You work on your project (not other bits and pieces)
  • You don’t have weekly or monthly performance reviews
  • You don’t attend team meetings

Does IR35 apply to you?

  • Does the contractor hold an office holder position?
  • If the contractor is unable to provide the services, would you NOT accept a substitute with equivalent skills?
  • Is the contractor NOT allowed to carry out any of the services from his own office?
  • Does the contractor have to work set hours (start & end time) stipulated by the end client?
  • Other than observing the end client specifications, does the client instruct the contractor about working methods?
  • Does the contractor have to report to a manager of any decription who supervises his/her work?
  • Once a piece of work is finished, does the contractor have to report to anyone to be given another task?
  • Is the contractor required to seek approval from end client to take time off?
  • Is the contractor subject to any internal rules & regulations other than health and safety for example?
  • Does the contractor use equipment given by the client instead of using his own equipment?
  • Can the contractor be moved from task to task as priorities of the end client change, without consultation with contractor?
  • Does the contractor have to take all work offered to him>
  • Is the end client obliged to provide the contractor with continuous work throughout the period of contract?

YES – COULD APPLY TO IR35

  • Does the end client have the right to terminate this agreement at any time?
  • Has the end client ever paid the contractor for time not spent on the service?
  • The contractor does NOT have their own website and/or stationary?
  • The contactor does NOT have their own business insurance such as Public Liability?
  • If fault work is carried out, the contractor is NOT financially liable to correct damage?
  • Is the contractor given any employment benefits such as overtime?
  • Does the contractor claim expenses using the end client’s own claim form?
  • Does the contractor have any line management responsibilities over the end clients staff?
  • Does the contractor have access to staff-only facilities?
  • Does the contractor fit in with other employees, without identifying him as a contractor?
  • Was the contractor ever an employee of the end client?
  • Deoes the end client provide the contractor with any free training?
  • Does the end client prevent the contractor from doing work for other customers during the course of the engagement?

NO – DOES NOT APPLY TO IR35

Background into IR35 and changes in April 2020:

What is IR35 – Introduced to counter avoidance of tax by individuals providing personal services via limited compnay. A look through provision. Asks simple question:

“If the limited company did not exist, would the relationship between the end client and the workder be that of an employer and employee?”

What is changing?

Currently, the person providing the work decides whether IR35 applies to them. But from April 2020 the responsibility of this decision will fall onto the client. Unless hte client is small*.

Why changed?

HMRC “We have estimated that only 10% of individuals working in this way apply the rules properly, costing the Exchequer hundreds of millions of pounds in lost revenue”.

Generally speaking, most clients are outside IR35 but corporates are taking a very negative view of what HMRC are dictating (to collect more tax).

*Small + – Annual turnover not more than £10.2 million, balance sheet total not more than £5.1 million, number of employees not more than 50 (monthly average).

Making the decision

Decisions are made ‘on balance of probability’

To make the process easier, HMRC have created a Check Employment Status for Tax (CEST) on their website. Answering a few questions says whether they think you’re employed or self employed.

If HMRC challenge you and you have used the CEST tool and it says self-employed, HMRC are not likely to overturn this.

The client must make this decision 

The client must issue a ‘Stutus Determination Statement’. The client is liable for any underpaid PAYE & NICs until the SDS is issues or if gets the decision wrong, unless provided with false information.

Status Determination Statement

In the SDS, the end client must give reason for the conclusion, whether IR35 does or does not apply. Must take reasonable care in concluding otherwise it is not valid.

The worker or the fee-payer may object to the decision, however they have NO right of appeal to HMRC.

Client has 45-day time limit for considering the case. Client must give reasons for it’s conclusion.

Written by Vegan Accountants

The expert team at Vegan Accountants take away the hassle and pressure of your accounts and tax compliance. Our wide-ranging services give us the flexibility to deliver tailored support for your business.

March 2, 2021

Need more advice?

Try searching for what you’re looking for below, or get in contact and a member of the Vegan Accountants team will be happy to help.

Latest Accountancy and Tax Advice

Keeping up to date with all of the current tax legislation is integral to what we do here at Vegan Accountants to ensure the best possible service for your business. Here’s a selection of our latest tips and advice.
Maximising Business Reserves

Maximising Business Reserves

We share 6 possible scenarios/options to consider for optimal tax efficiency when profits exceed the £50K total personal earnings basic rate tax band.

read more