What is IR35?
IR35 is a piece of legislation that is focusing on the employment status of self-employed contractors operating as a Personal Service Company (PSC/Ltd) and the impact on Tax and National Insurance contributions since 1999.
It was created to increase HMRC’s revenue on Tax and National insurance.
Previously it was the contractor who determined what their employment status was on an assignment.
New legislation now puts the onus of determination on the End Client/Company receiving the services in the supply chain.
This will now bring private and public sectors in line with each other.
This will affect all public services, and medium to large-sized End Clients/Companies.
New Changes affecting IR35
The “end client” must:
• Determine the status of each assignment
• Use reasonable care in making the determination
• Pass the statement to the next party in the supply chain
• Include the reasons for the determination
• Keep a record of the status determinations for each contractor
The ‘fee payer’ must:
• Pass the statement to the worker.
• If the assignment is deemed ‘inside’ IR35 rules, then the fee payer must ensure that this is deducted from any Tax and National Insurance contributions due
• Keep a record of the status determination for each contractor
How does it affect you if you are inside the rules?
- The end-client could decide on a blanket decision that they will not hire any Personal Service Company / Limited Company.
- You may face termination of your contract at the end of March.
- You will need to consider other options, for example: using an Umbrella company or taking a permanent position.
- There may be a reduction in the roles available to contractors throughout the UK and Europe (dependant on the end client receiving the service).
- Your rates may be reduced due to paying Tax and National Insurance.
Principles for a Determination Statement resulting in an ‘Outside’ IR35 judgement.
- Right to Substitution – It helps if the contractor has unfettered rights to substitute the service to someone else who is suitably qualified.
- Control & Direction – It is suggested that the contractor is free to decide how, what, when and where they do the work required.
- Mutuality of Obligation – The client has no obligation to offer work and the contractor has no obligation to accept. If the contractor passes both the substitution and control tests, then it is unlikely that obligation will apply.
- Financial Risk – The contractor will risk their own money for services such as marketing, electrical equipment or training. This also includes payment for missed deadlines or poor standards of work.
- Length of contract – The contract will relate to a specific project or piece of work rather than length of time.
- Termination Clause – Either party will have the right to terminate the contract without notice.
Focus on SAP and the Focus Cloud Group have created this guide for information purposes only. The guide was created using a range of sources and would recommend that you use a range of your own sources when making any business, legal, or financial decisions.
Should you be unclear on any aspects of IR35, Please seek further advice from HMRC.
