IR35 in Nottingham
What are Contractors?
An independent contractor (also referred to as a freelancer or consultant) is someone self-employed who carries out work for you. Typically, they’ll be contracted in for the specialised knowledge or skills they can provide for a defined period of time to work on a specific project.
What is IR35?
IR35 is the common term for the Intermediaries Legislation which is a tax legislation used to combat a form of tax avoidance whereby individuals are providing services similar to an employee but through a personal service company (their own limited company or partnership).
Some of the criteria used to determine whether someone is ‘inside’ (i.e. caught) or ‘outside’ IR35 is common sense; if you act like and are treated like an employee you should be taxed as one. However, there are a lot of grey areas in the legislation and some points which may seem relatively insignificant can have a major impact. Therefore it’s always best to consult an expert before making any decisions over your IR35 position.
How will your status be determined?
In short, IR35 involves applying three main principles to determine employment status from the Ready Mixed Concrete case. These are known as the principal ‘tests of employment’:
- Control: What degree of control does the client have over what, how, when and where the worker completes the work.
- Substitution: Is personal service by the worker required, or can the worker send a substitute in their place?
- Mutuality of obligation: Mutuality of obligation is a concept where the employer is obliged to offer work, and the worker is obligated to accept it.
Other factors are then taken into account to determine whether you are caught by IR35 including the contract type, whether you are taking a financial risk if you are ‘part and parcel’ of the engager’s organisation, being in business on your own account and provision of equipment.
All of this evidence is taken into account, and if the balance of probabilities is that the worker is an employee then IR35 applies. So, for example, if a worker genuinely has an unfettered right to send a substitute in their place, personal service is not required and IR35 cannot possibly apply. But, relying on that alone can be fraught with danger.
What impact will it have on contractors?
If assessed as inside IR35, contractors will need to pay the same income tax and NICs as if they were employed. However, they still won’t get any employment benefits, like paid holiday or sick leave, from the managing business.
Being assessed as inside IR35 can have a serious financial impact on the contractor and reduce their net income by up to 25%. Even worse, HMRC can go back at least six years and evaluate all contracts within this time to see if the legislation applies. As a result, contractors could end up owing hundreds of thousands of pounds.
As you can understand, many contractors are unhappy about the crack-down in IR35, and it could have a significant impact on the private sector.
Inside IR35 vs outside IR35
Inside IR35 vs outside IR35 comparison
Your IR35 status has different implications for the tax you pay.
When you’re inside IR35 you:
- are classed as an employee for tax purposes
- need to pay income tax and National Insurance Contributions
- pay this tax by making a ‘deemed payment’ at the end of the tax year
Working out your deemed payment can be complex, so it’s best to speak to your accountant to make sure you get it right.
But if you’re a public sector contractor, your fee payer will work out and pay your tax and NICs on your behalf (this applies to those in the private sector from April 2021 too).
Even though HMRC sees you as an employee for tax purposes when you’re inside IR35, you might not be entitled to employee benefits like holiday pay and sick pay.
When you’re outside IR35 you:
- are self-employed and operate as a proper business
- are responsible for your business’s taxes
- can pay yourself in a tax-efficient way
If you’re outside IR35 you’ll be paid your fee and will be responsible for managing your business’s taxes as normal.
How can Seagrave French help you?
How can Seagrave French help you?
There are many factors to consider in deciding if a contractor is caught by the notorious IR35 legislation.
Fundamental factors to consider:
- The right to get a substitute or helper to do the job;
- Mutuality of obligations.
Other factors to consider:
- Provision of equipment;
- Financial Risk;
- Basis of Payment;
- Opportunity to profit from sound management;
- Part and parcel of the organisation;
- Right of dismissal;
- Employee benefits;
- Intention of the parties;
- Length of engagement.
These are often matters of general employment law and not specific tax legislation. There is an enormous amount of Case Law in this area and the Taxman is not always right. They do not have the final say on whether somebody is caught by IR35 or not. We can argue your case for you.
The cost of employees and employers national insurance if you get it wrong are considerable as well as interest and penalties.
We can review your existing arrangements and give you our opinion on whether it will stand up to attack from the Revenue. We can help draft contracts for services to assist you and advise on how you can maximise your chances.
Whatever your ambitions, we will commit to them wholeheartedly and deliver the premium service you deserve. Get in touch today to book a chat with the experts at Seagrave French.