As a contractor working and operating within the UK, your IR35 status is what determines your annual tax contributions. Contractors that are working through a limited company and are operating outside IR35 are entitled to receive payment in the form of withdrawn dividends. Those inside IR35 are regarded by HMRC as 'disguised employees' and should receive payments through PAYE, with NICs and NI contributions deducted by the end client (or agency, if you're working with one). The legislation has been in place since 2000, but some upcoming amendments could mean a difference in the way you work if you're offering your services in the private sector.
What these upcoming changes mean.
In April 2021 responsibility for determining IR35 status is shifting from the limited company to the end client, or recipient of the service; it's a switch we already saw in the private sector back in 2017.
The amendments are coming into play with the aim of eliminating the avoidance of tax and National Insurance Contributions (NICs) when working through an intermediary, such as an umbrella company, in circumstances where the individual worker would otherwise be regarded as an employee of the end client.
How you can prepare.
If you're currently working one or more assignments, ensure your contracts are accurate and consistent, and that they don't state you're subject to procedures or processes that would typically apply only to an employee.
Ensure your clients think the same way you do, and understand that you are engaged for a specific project or assignment, rather than seeing you as an extension of their workforce.
If you're working with an agency, communicate with them to ensure you're also on the same page when it comes to the status of your role; they should be able to inform you as to what change, if any, your assignment will undergo as a result of the new changes.
IR35: Contractor FAQs
Will IR35 reforms affect the way I work?
If you are a contractor working through a limited company, pay yourself a salary, and draw profits as dividends, the upcoming changes could affect you. After the changes come into play you may be required to join a company payroll, depending on whether your assignments are deemed inside or outside IR35.
What is the difference between an assignment deemed inside IR35 and one deemed outside IR35?
Assignments are deemed inside IR35 when you are considered, for tax purposes, an employee of your end client and therefore subject to PAYE. Assignments are deemed outside IR35 when you are operating as a genuine business, and therefore operating outside of the IR35 rules.
Is there a legal definition of an “employee” or an “independent contractor”?
Case law is used to decide whether an individual supplying their services to a company is classed as an employee or is a self-employed contractor. Generally, HMRC will look at both the contracts between the parties and the working practices (the way the work is performed in reality).
Who is responsible for determining if my assignment falls inside or outside IR35?
Before 6 April 2021, if your client is in the private sector, it’s your limited company’s responsibility to decide your own employment status for each assignment. Once the changes come into effect in April 2021, the responsibility of defining the IR35 status of the assignment will switch from the individual’s limited company to the end client, as the recipient of the services.
What factors might suggest an assignment falls inside IR35?
If the following statements sound like they apply to the role, it’s likely to fall inside IR35: A substitute can be provided by the end client; the worker performs a set amount of hours per day/week; the worker is subject to the end client’s direction or supervision; the worker receives overtime pay or a bonus.
What factors might suggest an assignment falls outside IR35?
If these statements sound like they apply to the role, it's likely to fall outside IR35: The worker can hire someone else to do the work, or engage helpers at their own expense; the worker provides the equipment they need to do the job; the worker can decide how and when to provide the services; the worker regularly works for a number of different clients.
How does an assignment deemed inside IR35 work when working through an agency?
The end client pays the agency in return for any work done, and the agency (or an intermediary, such as an umbrella company) will be required to deduct your tax and NICs. SEC has partnered with FSCA accredited umbrella companies, and when working with us, the umbrella company will act as your employer and directly deduct your tax and NICs at source.
How does an assignment deemed outside IR35 work when working through an agency?
The end client will pay the agency in return for any work done, and the agency pays the contracted amount to the limited company. The limited company/contractor will then be responsible for their own tax contributions.
What can SEC do to help?
We have partnered with Qdos to provide a bespoke IR35 solution (which includes a digital IR35 status tool) to our contractors and clients, who are one of the leading providers of specialist contractor insurance services in the UK. Their online portal for managing the IR35 reform combines case-by-case assessments with a management system for recruitment agencies and end clients engaging contractors under the off-payroll working rules, with a tax liability cover. Get in touch to understand more.