This month, infamous reforms to IR35 will roll out, set to badly impact the 170,000 self-employed contractors operating in the private sector.

Many of these contractors will get caught out by IR35 legislation, meaning they will lose the benefits of self-employment and instead will have to pay tax and National Insurance as an employee would, without getting any of the perks or statutory benefits enjoyed by these workers. What’s more, these contractors may become subject to lengthy, expensive and often stressful IR35 investigations.

To help every contractor avoid the negative effects of IR35, in this guide Umbrella Broker takes a look at what IR35 is and explains whether it applies to your contract.

What is IR35?

IR35 is a piece of legislation that was originally introduced in 2000 to stop workers such as contractors from operating as ‘disguised employees.’ It was introduced as a way of targeting workers that claimed to be self-employed and therefore offered their services in a way that allowed them to take advantage of tax benefits, but who actually operated more like an employee.

Initially it was the responsibility of the contractor themselves to determine their own IR35 status. However, this changed when HMRC determined that too many companies were not compliant.

This ushered in further changes and from 2017, in the public sector, it became the responsibility of the client to determine the contractor’s IR35 status.

This meant that many public sector contractors were considered inside IR35, regardless of their actual circumstances. Here, it became the responsibility of the client to deduct the contractor’s tax and National Insurance from their fee before it was paid to them.

The problem was that many of these public-sector clients weren’t correct in their IR35 assessments, meaning thousands of contractors paid more in PAYE tax and National Insurance contributions than they needed, without receiving the benefits an employee would, such as holiday pay, sick leave, maternity/paternity leave and a workplace pension.

What changes have been made to IR35?

Although these changes have up to now applied merely to the private sector, from April this year these rules have rolled out to the private sector too.

Now, it is the responsibility of private sector clients to establish the contractors’ IR35 status which is set to badly impact the 170,000 limited company contractors out there who will end up paying more in tax and National Insurance.

Does IR35 apply to my contract?

There are a few tests that can help determine whether you will be caught out by IR35.

To avoid IR35 you must be genuinely operating on your own and will need to double check your contract to ensure it is IR35 compliant.

Here are a few things to look out for to determine whether you will be considered as inside or outside IR35 rules:

Control

One test of employment is control. This looks at the degree of control the client has over how and when the worker completes their work.

Contractors are hired to undertake a specific task and should only carry out the work outlined in their contract. This is an important test of IR35 status.

It is important that the client does not have the power to move the contractor from task to task or be able to tell them how to complete their work as an employer would.

There should also be no specific working pattern outlined in the contract as again, this may indicate to HMRC that you operate more as an employee than a contractor.

Mutuality of obligation

Mutuality of obligation refers to a situation where the employer is obliged to offer work and the worker is obliged to accept it. 

For the contract to remain outside IR35, you must be able to ensure that it lets you refuse work and grants freedoms, such as taking on other projects at the same time. 

If the client does offer you more work that is fine, but you will need to have a new contract drawn up and it should be treated separately.

Substitution

This looks at whether the contractor can send in a substitute to carry out the work for them.

If the contractor can’t undertake the contract at hand for any reason, they are allowed to bring in a substitute to do the work on their behalf. This is a key difference between a contractor and an employee who would not be able to do so.

A right to substitution clause in the contract clearly indicates that you really are a contractor and therefore this should be clearly stated.

Exclusivity

Contractors must be allowed to work on other projects. Exclusivity clauses are typical of employment contracts, however this shouldn’t be the case for contractors.

A contract that stops the contractor from working with other clients whilst undertaking the role at hand can raise red flags to HMRC.

Want to avoid IR35? Go Umbrella

One way to avoid getting caught out by IR35 is to go umbrella.

An umbrella company becomes the contractor’s employer, meaning the contractor is automatically exempt from IR35, meaning no need to worry about getting caught out.

What’s more, the umbrella company will give the contractor a range of benefits such as statutory rights like holiday pay, sick leave, maternity and paternity leave and a workplace pension.

Furthermore, the company will invoice the client on the contractor’s behalf and pay them a salary, processing their tax and National Insurance contributions through PAYE.

If you think going umbrella is the best move for you in 2021, let Umbrella Broker’s umbrella calculator help you find the best umbrella company.