Understanding IR35 and Its Impact on Contractors in the UK

IR35 is a piece of legislation originally introduced by the UK government in 2000, aimed at eliminating the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as limited companies or partnerships, particularly in the contracting sector. Often referred to as “off-payroll working rules,” IR35 seeks to ensure that workers, who would have been employees if they were providing their services directly to the client, pay broadly the same tax and NICs as employees.

What is IR35?

IR35 applies to individuals working through their intermediary, typically a personal service company (PSC), who, but for that intermediary, would be employees of the client. The rules were designed to prevent contractors working in a similar way to employees from paying less tax by working through their PSC.

In April 2017, the government reformed IR35 regulations for the public sector, and similar changes were rolled out to the private sector in April 2021. Under the reformed rules, responsibility for determining the employment status of a worker shifted from the individual contractor to the entity utilising their services, provided they are a medium or large-sized non-public sector organisation. IR35 has been nothing short of a complete headache for al involved, and it particularly causes a huge stress whenever an organisation just applies IR35 to everyone contracting with them, regardless of whether or not the test below is positive or negative.

Smaller Sized Businesses Exempt

End-clients will be considered by HMRC to be a ‘small business’ – and therefore exempt from the IR35 legislation – if they meet at least two of the following criteria for two consecutive financial years:

• Turnover of no more than £10.2 million
• A balance sheet total (assets) of no more than £5.1 million
• An average of no more than 50 employees

The Tests to Determine if IR35 Applies

Determining whether IR35 applies to a particular working arrangement involves several key tests. These tests aim to ascertain the true nature of the working relationship between the contractor and the client. Here are the principal tests used to establish if IR35 rules apply:

1. Control: How much control does the client have over what, how, when, and where the worker completes the work? If the client has significant control over the terms of the work, it’s likely that IR35 applies.
2. Substitution: Does the contract specifically require the worker to carry out the work, or can the worker send a substitute in their place? If the worker can send someone else to do the job, it is less likely that IR35 will apply.
3. Mutuality of Obligation: Is the client obliged to offer work, and is the worker obliged to accept it? If there is an expectation of ongoing work being offered and accepted, this can indicate employment and thus IR35 compliance.

You can run a test on the HMRC website to see whether or not your arrangement is caught by the rules.

Additional Considerations

• Financial Risk: Greater financial risk taken by the worker may suggest self-employment and thus outside IR35.
• Provision of Equipment: If the worker provides their own equipment rather than relying on the client’s, this can indicate that they are in business on their own account.
• Part and Parcel of the Organisation: If the worker becomes integrated into the client’s organisation, attending company meetings and employee-only events, it might suggest employee status.

Conclusion

Understanding whether IR35 applies to your contract can be complex, involving careful consideration of your working practices and contractual terms. IR35 can be a bit of a nightmare, but bear in mind it doesnt apply to small businesses. Contractors concerned about their status under IR35 should seek professional advice or request a determination from their clients about their status to ensure clarity and compliance.