Need clarity on IR35? Look no further – here’s our guide on everything related to IR35.
If you’re looking to become a contractor in the UK, or you are already an intermediary, then IR35 will be one of the most important pieces of legislation you’ll come across. It has been around since the year 2000 with various changes introduced, the most major changes were made in 2017 and 2021 with the Public and Private Sector reforms, respectively.
So what is IR35?
IR35, Inland Revenue release 35 (also known as the ‘off-payroll rules’ or the ’Intermediaries Legislation’) is a tax legislation used by the HMRC to combat possible tax avoidance. It is aimed at individuals who provide services through a personal service company (their own limited company) to determine whether the role they perform is similar to that of an employee. If you are deemed to be inside of the scope of IR35 legislation, you then you will need to pay tax as an employee, at source, if you are deemed outside of the scope of IR35 legislation when you can operate as a Limited Company in a normal fashion, typically paying dividends. Often with IR35 rulings, there are many grey areas. Before making any firm decisions, you should talk to an expert in the matter. Infraspec has a panel of experts that we can refer.
When the legislation was first introduced, it was the contractor’s Personal Service Company (PSC) that was responsible for assessing (performing the status determination) whether the contractor was inside or outside of IR35 legislation and therefore how their tax liabilities should be paid.
The HMRC general view was that high volumes of personal service companies were in effect working as employees often referred to as (disguised employees) and therefore not paying tax in the right way. This tax deficit has led to the Government making significant changes to the IR35 rules.
What were the major updates made to IR35?
In 2017, a major change was made to the Public Sector that stated the end client, who is the business receiving the services, would be responsible for assessing a contractors IR35 status, to determine if someone falls inside or outside the scope of IR35.
The responsibility of deducting tax from the contractors now falls to the party who pays the Limited Company (fee payer). In most cases, this entity is the recruitment agency/ employment agency. These same changes were then further introduced into the Private Sector in 2021.
The assessments are carried out using an IR35 status test, the HMRC has a basic version of their tool Check Employment Status for Tax (CEST). You can access it here.
Many end clients use this tool but it’s worth noting that it is a basic version, under an HMRC investigation many more questions will be asked. For these reason many businesses and contractors seek more clarity using an in-depth and thorough review performed by IR35 specialist businesses. For more information on these please speak to one of our consultants.
The results of the assessment are listed in a SDS (status determination statement), this is a document that details an end hirers IR35 assessment for a specific contractor. A copy should be passed to the contractor directly and through the supply chain. Your Consultant at Infraspec will ensure that you are clear on the role when we discuss with you.
Can I challenge my SDS?
Absolutely! Every contractor is entitled to challenge an end hirers IR35 SDS. If you want to do this, you will need to undertake an independent review and put forward additional supporting evidence.
As part of the IR35 assessment process, all hirers are obligated to offer contractors a clear process for challenging status determinations. This process can be initiated either by the fee payer or the contractor themselves. Once this process begins, the hirer has 45 days to inform the individual or fee payer whether the decision can be overturned or not. If it can, they need to provide a new SDS with supporting information in that timeframe.
Does IR35 apply to everyone?
No, it doesn’t. IR35 relates to personal service companies, individuals, If you are in business with others then the rules do not apply.
Further to above, the IR35 rule changes do not apply where the end client is deemed a small company.
The classification for a small company is as follows:
In order to be classified as a small business, two of the three above criteria must be met.
A key note is that where the end client is deemed as a small company, the responsibility for assessing and paying tax will stay with the contractor’s personal service company/ limited company.