IR35 – the basics

As any contractor will attest, determining whether you are inside or outside of IR35 can be a challenge at the best of times.  Especially as it was their legal responsibility.

In April 2017 changes were introduced to the public sector, which resulted in the end client now being responsible for determining the status of a contractor and whether they fall within IR35 or not.

These changes are now being rolled out across large and medium sized firms in the private sector from April 2020, which means the liability for incorrect determination will lie on the end client.

How to determine IR35 status

It is less about what you think and more about what HMRC look for.  The challenge is that whilst there are 6 key areas that determine IR35 status, it is not that simple.  However if you look at the below, this will act as a guide when determining IR35 status.  However it should be stated that not all of these need to apply or can apply, especially if there are security or logistical reasons why. 

  • Control: Is the worker free to work as they wish? For example, are they required to work from a specific office or at very specific hours?
  • Financial risk: Are there any personal financial risks incurred as a result of the performance of work duties? Employees rarely risk financial loss.  However there are financial consequences for a contractor, such as completing unpaid work if a project has not gone to plan or in outlying certain expenses which may not be paid.
  • Substitution: Is there a clause in the contract which allows a third party to perform the task given to the worker? I.e. can someone else cover.
  • Provision of equipment: Will the worker be using their own equipment? Employees use the equipment provided by their employer, whereas contractors can be expected to use their own.
  • The right of dismissal: Does the worker have a fixed notice period?  If so, then this is similar to an employee.  
  • Employee benefits: Does the worker receive benefits that an employee would, such as receiving holiday pay, sick pay or pension contributions.

 

The government have produced a CEST (Check Employment Status for Tax) tool which can help with these determinations .  https://www.tax.service.gov.uk/check-employment-status-for-tax/reason-for-using-tool

What about umbrella company workers?

Compliant umbrella companies effectively take the position of your employer and collect Pay as You Earn (PAYE) income tax and National Insurance contributions.  However it is important for anyone working this way to make contact with their provider so that they can reassure them.

And recruitment companies?

Recruiters will now need to understand whether a role is determined within IR35 or outside before advertising the role, so that they can advise any contractor.  Similarly they will be able to work with you if you would prefer to seek a permanent employment arrangement.

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