IR35 anti-avoidance tax legislation – the phrase itself sounds ominous and daunting. It’s therefore understandable that for contractors, the rules and regulations associated with ‘IR35 anti-avoidance tax legislation’ can be quite off-putting. That’s especially the case when you consider the conditional rules involved in the IR35 legislation.
Read on as we clear things up with a detailed introduction to the anti-avoidance tax legislation.
The history of IR35 legislation
In the past, some contractors found working with recruitment agencies difficult. Agencies were held liable for the tax errors made by contractors, making the process riskier. This, in turn, reduced the frequency with which they wanted to work with contractors.
To counteract this and ensure contractors could still work with recruitment agencies, they responded by setting themselves up as a limited company. This meant that third parties would hold no responsibilities concerning tax. This also had benefits for contractors as they had lower rates of tax and would be able to avoid National Insurance deductions.
HMRC then introduced legislation to clarify tax requirements. This is because they began to find contractors and companies avoiding the full deductions. Some contractors started to operate as ‘disguised employees’. This was where people were working full-time but billing for the work via invoice to make the process as tax efficient as possible.
With HMRC taking lower tax rates from those working as limited companies, they implemented the IR35 legislation in 2000.
What is the IR35 anti-avoidance tax legislation?
The IR35 legislation is in place to determine a true reflection of a contractor’s employment status. It’s often referred to as the intermediaries legislation and affects those operating as an off-payroll worker. In this case, the limited company is essentially an intermediary, whereby contractors should still be contributing both PAYE tax and NI.
The legislation has made it imperative that contractors are aware of their status. The repercussions of wrongfully determining your status are plentiful. Not least because the tax savings obtained by those working as a limited company will have to be paid back if the status has been wrongfully determined.
The IR35 rules
To demonstrate that they are not a ‘disguised employee’, a contractor must be able to adhere to certain criteria. The requirements will then determine if a contractor is inside or outside of the IR35 legislation. The general gist is that IR35 will not be applied should the contracts you work on be an alternative to full-time employment.
Mutuality of obligation
You should be able to work from contract to contract with no obligation to continue working for a client. Likewise, the client has no requirement to find you work once your contract is complete. If there is obligation in either party, then you will be inside IR35 as this is similar to a contract of employment.
Substitution
While working on a project, if you fall ill or are unable to go in for the day, then you should be able to substitute yourself with someone else to complete the work. If a client wants only you, and will not accept a substitute, then this is also a similarity to employment and you could fall within IR35.
Supervision, direction and control
This part of the criteria can be key with IR35. If you have no control over the work set, then you will fall inside of the legislation. This can include whether you can turn down work, whether you must complete work during a certain time or if you are given excessive input on how to complete work. All of this is similar to a full employment contract and will raise flags with HMRC.
Inside and outside
If none of these criteria apply to you, you will likely be deemed as working outside the IR35 legislation. This means that you can continue to pay yourself via your own limited company. However, being inside will mean HMRC declare the working relationship as an employment contract. This means that tax and National Insurance will be taken from your earnings. Also, there will liability for any missing tax.
Determining your status
There is a huge difference for contractors depending on whether they are inside or outside of the IR35 legislation. Unfortunately, IR35 has a perspective-based criteria. This has made it extremely hard for contractors to accurately and reliably determine their status.
HMRC has provided tests for use by contractors, but the CEST tool has been under question recently. It can be used by agencies, organisations and contractors and covers various aspects of daily working concerns. This can include anything from responsibilities and how the worker is paid through to more specific conditions such as who gives a contractor work and who decides when it is done.
These queries can clarify if a contractor has control over their work in terms of determining whether they can be considered an employee.
By taking these tests, you or the organisation you are working with can demonstrate that you have taken reasonable care should your status come under question. It’s important that with any new contract, the test is retaken just to ensure that the status is accurate.
IR35 and umbrella companies – how do they work?
Many contractors choose to tackle the confusion surrounding IR35 by working with an umbrella company. In this scenario, contractors will be hired by the umbrella scheme as an employee. The organisation will then act as an intermediary for the contractor. They do this by invoicing and negotiating with clients on a contractor’s behalf.
The key benefit of working with an umbrella company is that you will be deemed as a full employee. This means that the umbrella scheme will not only take care of all monetary requirements – including tax and accounts – but you’ll have access to the likes of sick pay and pensions.
Most importantly, the IR35 legislation won’t apply to you. Since your position will be clear, you’ll know exactly how much tax you need to pay a month. You also won’t have to worry about being caught out in the future and face additional costs.
