I love a good blog post, there’s nothing I like more than a good topic to write about. I’ve been putting this one off though ever since Anna, the Operations Manager at Hasson Associates, said to me “You should write something about IR35” and for some reason I replied “Sure! Of course!” before realising that IR35 is quite a dry topic to write about. There aren’t many subjects that have that effect on me, other than possibly income tax, Jeremy Clarkson and Instagram filters.
So yes, IR35 is really boring, but if you are a contractor and have your own limited company, it’s an important thing to know about, and the rules are changing in April 2020.
Let’s start by breaking down IR35:
What is IR35?
IR35 is legislation which is relevant to anyone who operates under their own limited company. HMRC ensure that contractors are not disguised employees of the agency or client. If you are contracted through an employer but you’re acting as an employee, that assignment should be taxed as an employed earner (i.e. subject to income tax and national insurance contributions).
Can I ensure I avoid IR35?
The short answer is no. Each contract needs to be evaluated. However, there are certain steps you can take to make sure that as a limited company, you are remaining a “supplier” rather than an employee.
What happens if my contract doesn’t fall out of IR35?
You would have to comply with the same tax obligations as a PAYE employee.
Who decides whether a contract falls in or out of IR35?
In the public sector, the client. In the private sector it is currently up to you to have your contract reviewed by a legal professional… until April 2020 (We’ll come back to this)
When HMRC investigates, what are they looking for?
There are a variety of indicators HMRC use to establish whether somebody is a disguised employee:
- Can you provide a substitute?
If you are working under a limited company and, for example, you fall ill will the company accept a substitute? When you are contracting as a limited company, the engagement is between the client and the limited company as a legal entity, not you personally. Therefore, you should be ready to at least try to provide a substitute and your contract needs to state as such.
- Are you subject to the client’s direction, supervision or control?
Is someone dictating what work you do and how you go about doing that work? Are you closely supervised? How much control does the client have over your work? If everything you do is closely monitored including the hours you do it in and where you do it, this may fall into IR35.
- Is there mutuality of obligations between you and your client?
Is your client obliged to offer you work, and are you obliged to accept it? The answer should be no.
The above 3 are the main indicators. However, the below should also be considered:
- Do you invest in your own business?
Do you take yourself on training courses? Do you buy equipment for your business? Ideally, the answer should be yes. You should be trying to grow your limited company.
- Do you provide your own equipment and training?
While using a company laptop is usually ok, if there are specific tools that you used to complete your assignment, these should be provided by your own limited company. Think of it this way, if you engaged with a builder to build you an extension, while they might borrow a spirit level if they forgot theirs and you’ve got one handy, it is unlikely you would provide all the tools such as a wrench, hammer, saw, nail gun, spirit level and a ladder. Similarly, with training, you would expect them to have all the relevant qualifications before they start – you wouldn’t train a builder to plaster the walls.
- Do you receive holiday/sick/maternity pay from your client?
If you are engaged with a company as an independent contractor, you should never be receiving holiday/sick/maternity pay from them.
So what exactly is changing in April 2020?
The legislation itself stays the same. The very important change is that like the public sector, the client or agency will now have to decide where the contract falls and will bear the brunt of the financial burden of getting it wrong, although this doesn’t mean the contractor will necessarily get off scot free.
How does this affect me?
Well, it’s swings and roundabouts. The good news is the focus is taken off you and onto the client. The bad news is that for clients of large and medium sizes, they can face large penalties. This means some clients have stopped taking on contractors all together and insist everyone goes through umbrella or PAYE. This is not ideal if you’ve been building your own company for many years.
What are we doing as an agency?
As an agency we are currently reviewing our contracts that we send out to you when you contract through us, meaning there are no grey areas or wording that could put you in a difficult situation. To do this we are using our Contractor Accountants specialised legal team. We are also making sure our clients are aware how small changes to the way a contract works can make them stay outside of IR35.
What can you do as a limited company?
If we do everything our end, then in theory this will not have to be something that you will need to worry about. However, if you would like your contract reviewed or would like something changed, get in contact with a reputable Umbrella company who are well placed to provide you with information and guidance. You can also visit the government website here > https://www.gov.uk/guidance/understanding-off-payroll-working-ir35
So there we go. All summed up in under 1,000 words, IR35. Hopefully next, Anna will ask me to write about my cats.