HMRC and IR35
- HMRC introduced IR35 in 2000 to tackle what they call ‘disguised’ employment.
- This is where contractors use their limited company to work for an organisation through an intermediary but, would be considered an employee if that intermediary did not exist.
- HRMC’s focus on ‘disguised employment’ stems from businesses evading paying employer NICs and employer benefits.
- IR35 assesses whether contractors are for all intents and purposes employees when they take on work for clients. If you are ‘inside IR35,’ HMRC sees you as an employee and you face an income tax and National Insurance burden, just as employees do. You do not face this if you’re ‘outside IR35.’
How does this affect contractors?
- HMRC introduced a new legislation in April 2017 referred to as “off payroll working rules’ for the public sector.
- This legislation will be applied to the private sector in April 2020.
- This legislation will change the way IR35 is enforced and shifts the responsibility away from HMRC and onto the end client business/fee payer. This means that the final determination of a contractors status will be determined by the end client business rather than the contractor. For contractors placed through recruitment agencies, this means that the recruitment agency (Venquis) will be liable.
Public sector and private sector rules
There are currently different rules for public sector and private sector contracts.
- For public sector contracts – the employer is responsible for working out whether the contractor falls inside or outside of IR35. If they fall inside, the employer, agency or other third party who pays the contractor then needs to deduct tax and NICs and report them to HMRC
- For private sector contracts – the contractor is responsible for working out whether they fall inside or outside of IR35. If they’re inside, they need to pay the tax and NICs due
Private sector IR35 reform is set for April 2020, this means private sector employers hiring contractors will be responsible for determining their IR35 status.
IR35 checklist: am I compliant?
In general, IR35 will not apply to you if the contract is for services rather than employment. To untangle that, you should see whether the contract specifically mentions these principles:
- Supervision, direction, control – this relates to how much say your client has over how you complete your work. For example, if you must work at certain times, this implies employment
- Substitution – are you able to bring someone else in to complete the contract, or do you need to do the work yourself? If you can’t send someone else, you’re likely to be within IR35
- Mutuality of Obligation (MOO) – is there an obligation on the employer’s end to offer work, and do you have to accept it? This is called mutuality of obligation, and if it exists, the contract will fall within IR35
- Equipment– HMRC often trys to argue that if equipment is provided by the client, and you don’t use your own, you’re a disguised employee
- Financial risk– self-employed contractors usually take a degree of financial risk, like any business would. Are you responsible for errors made during the contract, and would you need to rectify them in your own time? There’s usually a requirement to have professional indemnity insurance
- The way you’re paid– self-employed people are paid on a project basis, which might mean when the work is completed or at particular project milestones
- ‘Part and Parcel’ of the organisation– if contractors become so ingrained that they become part of a company’s structure, with people reporting to them for example, this points to employment rather than self-employment
- Exclusivity– do you work for other clients? Typically, the self-employed can work for multiple clients at once
- Intentions of the parties– the contract should make sure the relationship between contractor and client is one of supplier and customer, but this should be genuine. If HMRC found the actual intended relationship is more like an employee and employer, they’ll ignore the contract
- Business ‘on your own account’– essentially this determines whether you’re running your business as a business. If you have things like a business website, a dedicated office space, and even employees, you could be seen as operating a business and not offering your services in the same way as an employee
- The IR35 legislation makes the client business responsible for determining the IR35 status for the contractors they pay. This will be the client business or, for the contractors placed through recruitment agencies, the recruitment agency is likely to be liable. The recruitment agency (in this case Venquis, will ask our contractors to provide an opinion on their IR35 status, and then we will establish a process to make this as seamless as possible).
- The company that pays the contractor (if it is not the client business) can ask the business’s views on whether a contractor is within IR35 in writing. The company is statutorily obligated to provide an answer within 31 days.
- Venquis is the employer and the contractor is assumed to be inside IR35 if no response is received.
- We will take responsibility in determining if a contractor is inside or outside of IR35.
Venquis’s responsibilities if a contractor is inside IR35
These apply to the public sector; we are unsure whether they will apply to the private sector at this stage.
- This legislation leaves the liability with Venquis to determine the contractors IR35 status. For contractors placed through Venquis, this means that we will be liable for that determination.
- The fee payer is required to treat all payments to the contractor as earnings, deduct VAT and expenses and then apply employment income tax and NIC’s on the contractor’s fees.
- The fee payer is required to pay the tax and NICs as well as employer NICs to HMRC through the RTI system.
- It’s important to consider whether the fee payer will also be accountable for funding the NICs, this will depend on the contract, but it is possible.
How will Venquis prepare for the IR35 legislation?
- We will show we have done our due diligence in classifying a job as being outside IR35.
- Have written confirmation from the client business that the worker’s job is considered by them to be outside IR35.
- Have confirmation from the worker that they are operating through an intermediary e.g. a PSC.
- Have written confirmation from the worker that they have been assessed and are happy operating outside of IR35
- Continue to submit VAT returns and EI reporting in respect of the business client’s payments to the contractor.
- Ensure that the contract between the recruitment agency and the worker mitigates risk by:
- Define the worker’s status as a contractor operating outside payroll in unambiguous terms
- Define the worker’s responsibility for actions or omissions on assignment
- Ensure that they are properly indemnified against any risk of liability for both direct and indirect losses caused to the client by the worker.
If contractors are placed as 'disguised employees' inside of IR35, what should recruitment agencies do next?
- Manage responsibility for the contractors pay, deduct the VAT, and expenses, then deduct income tax and NIC’s.
- Manage responsibility for reducing the client’s employer NIC’s and you potentially paying the employer’s NIC’s
Ask our IR35 expert Rocky Patel a question
We’ve worked hard to ensure our clients and our contractors are as informed and prepared for IR35 as possible. Rocky Patel is here to answer any questions.
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