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When you are determining whether or not IR35 applies to you, you will either be found to be ‘inside IR35’ or ‘outside IR35’. These phrases are crucial to defining and understanding your status, and considering whether or not the legislation will impact your future contractual work.
So, what does it mean to be either inside or outside IR35 and how can you tell which one applies to you?
The IR35 legislation applies to contract workers who operate as a limited company, working for a third party to provide specialist services to the client that they are working for at any one time. HMRC will look at each individual’s contract and their workspace, to determine whether or not they are inside or outside IR35. If HMRC finds that a contractor is being treated as a full-time employee, or is receiving the same benefits as a full-time employee, they will be deemed as inside IR35. These contractors are deemed as ‘disguised employees’ and are suspected to be tax avoiders.
HMRC are undertaking investigations on such individuals, to discover whether or not they are using the fact that they are working under a limited company to avoid paying higher tax and national insurance. If such individuals are found to have been avoiding tax, they will have to pay the owed monies to HMRC. The new rules now state that any money that the employer hasn’t paid in terms of national insurance will also be claimed back by HMRC.
If you are found to fall inside IR35, you are expected to pay the same amount of tax and national insurance that a permanent employee would pay. You are subject to PAYE and should have the correct funds deducted from your pay each month. Similarly, your end user client should also be matching the national insurance paid to the government, and therefore, you will both be held accountable if these funds have not been paid incorrectly.
Within the public sector, the agency or hiring body will deduct national insurance and income tax from your pay cheque each month. On the other hand, if you work in the private sector, as per the off-payroll rules, your employer is expected to determine whether or not their team members should be deemed as being inside IR35. If they do not provide the correct information to HMRC, they are likely to be billed the monies owed to HMRC.
If you are working outside IR35, you are operating legitimately as a contractor and are being paid by your limited company, and doing so outside of the IR35 rules. You will have the responsibility of ensuring that you are paying the right amount of national insurance and tax on the money that you receive for your work. You are not subject to PAYE by the contracted employer.
For clarification, HMRC has developed an online employment status tool (CEST) for contractors unsure of their liability under IR35. If you are receiving the same rights as that of a permanent employee, for example, holiday entitlement, sick pay, or if you are receiving certain benefits, you will likely be deemed as inside IR35. HMRC uses the following factors to test your IR35 eligibility.
If your employer has the option to send a substitution to complete works in your place, it suggests that you aren't providing a personal service, and the worker isn't an employee.
If your employer control your workload and the way in which it is carried out, it suggests you are inside IR35 as you are not deemed as providing a specialist service.
3. Mutuality of obligation (MOO)
If both parties pass the above tests, it is unlikely that MOO applies as it will be deemed outside IR35 anyway. MOO can be present in both contracts of service and contract for service.
4. Risk – If a contractor can make a profit or a loss i.e. financial risk this would suggest that the contractor is outside IR35.
Organisations will only need to determine whether the rules apply for contracts they plan to continue beyond 6 April 2021.
Defining whether you are inside or outside IR35 before and during every contract that you undertake is crucial, as every contract is different and each can be taxed differently if needs be. Be sure to follow the above advice and speak to your employer or seek specialist advice if you are unsure about the status of any contractual roles you apply for. Learn more about what IR35 is and what the new rules might mean for you here. Alternatively, if you are looking for new opportunities in your sector, get in touch with your local Michael Page office today.
This material is intended for general information purposes only and does not constitute legal advice. Specialist legal advice should be taken in relation to specific circumstances.