In order to understand IR35, we need to take a look at it’s history.
Back in 1999-2000, there were several high profile stories about high earning public sector employees resigning from their jobs, and setting up as a limited company to take advantage of the tax-efficient structure. However, they performed the same job role and tasks as a permanent employee which became known as false employment or disguised employees. However, ministers worried that it would be difficult to tell the difference between legitimate contracting and permanent employment. As a result IR35 was formally introduced in April 2000, within the Finance Act.
In 2016 following a review, the HMRC estimated that a third of contractors were operating under the incorrect IR35 status, and should be classed instead as an employee, and therefore pay the appropriate tax and NI.
The responsibility for determining the correct IR35 status had lay with the contractor themselves for more than 15 years, until the reform for the public sector was rolled out in April 2017 and the HMRC decided that there should be greater emphasis on the recruiter when deciding a contractor’s IR35 status and therefore the responsibility and liability for missing tax should the HMRC have an issue would lay with the agency.
These reforms are set to be extended into the private sector in April 2020.
IR35 is a piece of UK tax legislation designed to stop workers claiming to be contractors purely for tax benefits when in reality the business is more like an employer-employee relationship.
If you’re a contractor, you need to make sure that you’re IR35 compliant. If you are a recruiter, you will need to make sure your candidates are IR35 compliant.
The HMRC don't make it easy to distinguish between ‘contractors’ and ‘employees’, and there are a variety of questions you need to ask to gauge your status. There is no definitive ‘rule’ to IR35 and if you can justify your position, you shouldn’t be placed on payroll as an employee. However, If your role is classed as employment, the HMRC might say that you’re inside IR35. This would mean you will need an employed status and will have to pay Income Tax and National Insurance on your earnings just like an employee would.
If the HMRC finds that you have been working on a self-employed basis (outside IR35), when the reality is the work you do for your client reflects employment (inside IR35) you will be required to pay back the missing tax, plus interest and any penalties.
If you are ‘inside IR35’ this means that you are considered as an employee of your end client, for tax purposes, and will therefore be subject to PAYE. If you are ‘outside IR35’ this means that you are operating as a genuine business, and are able to remain responsible for your own taxes.
Determining if you fall inside or outside IR25 can be difficult without professional help. Whilst there are recognised tests to consider, and for some this will be enough to accurately determine ones IR35 status, for others this can be very challenging.
If you are a contractor or an agency and want more information about IR35 or help determining you or your candidates status, please feel free to ask one of our team for advice.
If you (or your candidate) decide to use Hero as your payment intermediary, you will not be affected by IR35 and do not need to worry! We will provide you with an employment contract and all of the associated benefits including statutory payments such as SMP, SSP, SAP and SPP. As a result you will be 100% IR35 compliant.
Call us today on 0203 837 6157 to discuss your circumstances and receive a free illustration.