What is IR35?

IR35 is a new law designed to reduce tax evasion among freelancers and contractors. Some workers were disguised employees, meaning they operated as permanent employees but were contracted through their own company to claim tax benefits.

Since 6 April 2021, the way the status of independent contractors is determined by the clients they work for has changed. Now, the onus is on the client to know whether their contractors are inside IR35 or outside IR35.

What are the criteria for IR35

There are a variety of factors that help determine whether a contractor falls inside or outside of IR35. Some of these include:

• Control: If the client has a significant amount of control over how, when and where the work is carried out, it is more likely that the worker will be classified as an employee.

• Right of substitution: If the worker is required to provide their services personally and cannot send a substitute in their place, this suggests they are an employee.

• Mutuality of obligation: If there is an ongoing expectation that the worker will be offered work and will accept it, this suggests an employment relationship.

• Financial risk: If the worker bears some financial risk, such as by providing their own equipment or covering their own expenses, this suggests they are self-employed.

• Integration: If the worker is integrated into the client’s business and works as part of the team, this suggests they are an employee.

It’s important to note that there is no one factor that determines IR35 status on its own, and each case is considered on its individual merits based on a range of factors. If a worker is found to be inside IR35, they will be required to pay the same tax and national insurance contributions as an employee.

FAQs on IR35

How is IR35 determined?

The assessment involves evaluating the overall picture of the working relationship, rather than just looking at individual factors in isolation. If the assessment shows that the worker is effectively an employee, then the IR35 rules will apply, and they will be required to pay taxes and National Insurance contributions in the same way as a regular employee.

What is the purpose of IR35?

The purpose of IR35 is to ensure that individuals who work for a client through an intermediary, such as a limited company or a personal service company, are subject to the same tax and National Insurance contributions as an employee would be, if they were working directly for the client.

What is inside IR35?

Being inside IR35 means the contractor-client relationship has enough similarities to a full time employee / employer relationship for the contractor to be deemed in actual fact a disguised employee.

What is outside IR35?

Being outside IR35 means the contractor-client relationship is a normal one. The contractor is there to do a specific job, doesn’t have access to employee benefits, has the freedom to work on their own without management supervision, brings their own equipment, and can terminate a contract when they wish.

Who does IR35 apply to?

IR35 doesn’t apply to genuine contractors providing services. It could be anything from plumbing to accounting. Those contractors do not fall inside IR35 as long as they are not disguised employees.

Falling inside IR35 will prevent the contractor from using traditional tax-planning methods such as a small salary and high dividends to minimise tax obligations. Instead, the client will have to pay almost the entire fee as salary to the contractor, meaning income tax and NI will have to be paid.

What are the new IR35 rules?

In April 2021, the UK government introduced new IR35 rules that shifted the responsibility for determining whether the rules apply from the contractor to the end client. These rules apply to medium and large-sized private sector clients who engage with contractors through intermediaries such as personal service companies (PSCs).

Under the new rules, the end client must carry out an assessment of the contractor’s employment status and determine whether the IR35 rules apply to their engagement. The end client is also responsible for issuing a Status Determination Statement (SDS) to the contractor, which outlines the result of the assessment and the reasons behind it.

What is happening with IR35

There has been ongoing debate and controversy around the IR35 legislation since it was first introduced in 2000 and several U-turns concerning the measures. In September 2021 it was confirmed that the IR35 rules would be scrapped from April 2023. A few weeks later, in October 2022, the new Chancellor announced changes to tax measures that had been previously introduced, and these changes included cancelling the plan to scrap the IR35 rules. For now, IR35 is here to stay.

How can IR35 be avoided?

It is not advisable to attempt to avoid IR35, as doing so may lead to penalties and legal consequences. In order to avoid these problems, individuals and businesses should take the necessary steps to ensure that they are compliant with the IR35 legislation, including conducting an IR35 assessment, ensuring that the engagement is genuinely self-employed, avoiding “mutuality of obligation”, and seeking professional advice and compliance solutions.

What to do if IR35 applies to you

If IR35 applies to you, it means that you are deemed to be working as an employee for tax purposes, even if you are working through an intermediary such as a personal service company (PSC). This means that you will be subject to income tax and National Insurance contributions in the same way as an employee.

If you are working through a PSC, the intermediary will be responsible for deducting income tax and employee National Insurance contributions from your pay and paying them over to HMRC. The end client will also be responsible for paying employer National Insurance contributions.

Find out more about what IR35 means for your business and for your contractors, and how VinciWorks can help.

How we can help

VinciWorks Omnitrack solution can be used to track anything. Our specialised IR35 forms will help determine which contractors are likely to be covered by the rules. Additionally, the system can flag relevant users and produce reports to enable you to stay on top of the requirements. 

If you want to learn more about our IR35 reporting solution, complete the short form below and a member of our team will get in touch.