The ever-increasing number of workers who operate as contractors and small business owners, despite having a single big client they work with on a regular, long-term, or even permanent basis led to the introduction of IR35 in the public sector last year. Since then, many contractors have found themselves confounded by the legislation and struggling to understand if they are inside or outside IR35.
Situations surrounding IR35 are particularly prevalent in the IT sector, but they affect all industries and any workers operating on a contract basis. To help you wrap your head around the complexities of the legislation and exactly how it affects your work – particularly if you’ve been placed in a role by a recruitment agency – here’s our easy, no-nonsense guide to IR35 for contractors…
The upshot of IR35 is that it was introduced to ensure workers were paying enough tax and national insurance. There are certain tax benefits to being a contractor, rather than a PAYE employee, and the government decided it was time to put a stop to contractors operating in the grey area between PAYE and self-employed benefiting from paying less tax than their employed counterparts.
The problem with IR35 is that the legislation itself is highly complex and extremely confusing, making it very difficult to determine where you stand. Those who are ‘inside’ IR35 are individuals claiming to be contractors whom the government have determined are actually employees, and should be paying an equal amount of tax to a PAYE employee. Being inside the legislation isn’t illegal, however it is considered tax avoidance and that comes with certain penalties. As a result, it’s important to know if you’re inside or outside the legislation. Those who are outside are considered to be genuine contractors able to reap the tax benefits.
You would think that this is a fairly straightforward distinction – if you’re a genuine contractor, there’s no issue. If you’re working for a single client on a long-term basis then (at least for the duration of that contract) you count as an employee. And if that were all there was to it, everything would be nice and simple. Alas, HMRC don’t like to make things that easy, and distinguishing between contractors and employees has become an ongoing headache, due to the lack of a definitive ‘rule’ for IR35 that allows you to clearly determine if you’re inside or outside the legislation.
While the full IR35 legislation is a nightmare to comprehend, there are three core takeaway points its vital to remember if you’re trying to determine whether or not the new rules are going to catch you out. You are considered to be inside IR35 (and therefore inadvertently committing tax avoidance) if you meet all three of these criteria:
There was a lot of confusion when IR35 first came into force, in that a lot of public bodies assumed initially that all contractors were going to fall within the IR35 legislation. This caused a lot of understandable confusion and panic, and a lot of contractors turned to HMRC’s Employment Status Service (ESS) tool in an attempt to determine if the roles they had would be reclassified under the latest guidelines, or if they could continue to work as they had been.
The majority of organisations have since hired managers who can independently assess the roles of contractors and determine if they are inside or outside the new guidelines. They consider the roles that are being undertaking, and ask end clients to take responsibility for determining if a worker is inside or outside IR35.
The issue for contractors is that such internal assessments produce a wide variety of outcomes that are quite inconsistent. As a result, the crux of the IR35 issue is that clients aren’t able to either completely appreciate or understand how interim consultants and contractors work on a practical level.
Contractors should work under certain procedures and operational necessities. If the client doesn’t have a clear understanding of how their consultants actually work it’s incredibly difficult to determine if they’re inside or outside IR35.
This issue is only exacerbated by the wide diversity that exists among contractors and the nature of the roles and the work they do. Every contractor needs to be considered individually in order to effectively determine their status and make an informed decision where IR35 is concerned.
In short, it’s a time consuming and generally stressful process, made worse by the fact that a wrong decision can be costly to clients, making it far easier for them to er on the side of caution and rule their contractors inside the guidelines, than risk the repercussions of declaring them outside.
The introduction of IR35 hasn’t only affected contractors, it has also affected recruitment agencies. Given that the new legislation was introduced to effectively close a loophole that had been allowing individuals working in full time positions to be counted (for tax purposes) as freelancers, this is unsurprising, as recruiters often place freelance workers in full time positions, either or on a short-term, long-term, or permanent basis.
Some of those workers fall within the IR35 guidelines and should indeed be counted as employees. But many are still genuine contractors who fall outside the guidelines, and any recruitment agency that’s unable to effectively deal with the issues IR35 poses to those who are genuinely outside the rules are going to struggle.
Since responsibility for determining if a contractor is inside or outside the guidelines ultimately rests with the party paying the contract, there are some instances where recruitment agencies are the ones to decide. Even if they aren’t making the decision, they still need to be able to effectively place contractors in roles that are not going to see them ruled inside IR3 unfairly.
Any agency worth their salt will liaise with clients on a case by case basis to ensure their client has a clear understanding of how the contractor actually works, allowing them to make an informed and fair decision regarding IR35, rather than simply playing it safe and ruling them inside the guidelines whether they are or not.
If you’ve been placed in a role by an agency, and you’re unsure who is determining your status, that responsibility rests with the fee payer. This may well be the client you’re placed with, it could also be your recruitment agency, or another third party who is acting as an intermediary. They will be responsible for calculating the tax and NICs, and paying them directly to HMRC out of the fee charged for the work you’re providing.
Once this is done you will then be able to set against your own liability for tax and NICs for the duration of the tax year. This amount is the equivalent of the payment you receive from the party paying the fees, which has already had all tax deducted from it.
Want to know more about IR35 now? There’s no need to wait, feel free to get in touch online or call us on 0333 023 0073 to discuss how the legislation will affect you.
