An alarming number of contractors still aren’t aware of IR35, and those that are may find the legislation too intimidating and bury their heads. While IR35 – or the ‘off-payroll rules’ – has been active in the public sector since April 2017, the private sector is yet to have the legislative reform. Larger businesses are already taking precautions with new contractors, with HSBC going as far as to cull contractor relationships altogether from September 2019, so it’s incredibly important for the self-employed to understand their position.
So how do you know if you’re inside or outside IR35?
What is IR35?
In its simplest form, IR35 is anti-avoidance tax legislation. It was introduced by the government to combat and prevent income tax and National Insurance Contributions (NICs) avoidance schemes.
At the time of introduction, there were cases of employees finishing work on Friday and coming back to the same job on Monday as a limited company contractor. This meant that, despite having the same daily tasks and responsibilities, they saved a substantial amount on tax and increased their take-home pay. These workers are dubbed ‘disguised employees’ by HMRC, and it’s this type of tax avoidance that IR35 is designed to tackle.
However, due to the heavy-handed approach taken by the taxman (and its inaccurate Check Employment Status Test – or CEST – tool), many genuine contractors are being stung by the recent legislation reform.
How do you know if you’re inside or outside IR35?
There are many ways to check your IR35 status, but there are three central tests that are universally recognised as off-payroll metre sticks – Control, Substitution and Mutuality of Obligation (MOO). Whilst a tribunal would take into account every aspect of your client-contractor relationship, the below are usually pretty telling as to whether you should take further action to prepare for IR35 in the private sector or not.
How much control do you have over your working day? If you have the below in your contract, you could be considered inside IR35:
- inflexible start and finish times;
- specific days you must work for the client;
- lunch break times and duration;
- specific clauses stating the client has supervision and control over your work.
All the above usually appears in a contract of employment (as opposed to a contract of services, which is what a genuine contractor should have) and can cause you to fail an IR35 investigation. Freelancers and contractors have control over when and how they work.
Can you supply a substitute? If you aren’t well enough to attend a job, could you send someone in your stead to complete the work? If so, then you most likely fall outside IR35.
However, there should be a right of substitution clause in your contract specifying your right to do so as a contractor – if the client has specified that you can’t supply a substitute under any circumstance, then you could be in trouble. Contractors are free to send someone else in their stead, provided the work is completed to an equal standard.
Mutuality of Obligation (MOO)
Can you choose the jobs you work? Does one main client dictate whether you can accept other clients while working with them? If your contract specifies exclusivity or states any number of obligated hours of work a week at a set rate, then you could fail IR35.
Contractors can take whichever projects they choose from whatever client they wish to work with. They should also be free to turn down work from any given client.
HMRC’s CEST tool currently omits MOO, which is a weighty consideration in whether an individual can be classed as a contractor or not. To compensate, make sure the rest of your contract is watertight against Control and Substitution checks as well.
What can I do if I think I’m inside IR35?
If you fail an IR35 test, you can expect to pay around 25% more in tax every year, which would amount to a huge chunk of money absent every month. You also still wouldn’t benefit from employment rights or have a contract of employment with your client, so you could face critical financial issues with no real benefits or protections to speak of. It’s important to take the necessary precautions to avoid this situation.
Of course, if you are a genuine professional contractor, freelancer or consultant who is in business on your own account, you shouldn’t have anything to worry about. Read up on how the legislation works and apply best practice. It would also be worth having a defence prepared in case you’re investigated by HRMC; whilst you may know that you’re legitimate, IR35 determinations are notoriously subjective.
Should you want some peace of mind, we offer a full contract review amongst other services to help you prepare for IR35. We’ll give an explicit pass or fail based on the current contract you hold, along with comprehensive comments on how to improve any problem areas.
We also offer IR35 Tax Investigation and Liabilities Insurance (TILI) which protects against the court costs that could arise from an HRMC case. It also covers representation by a tax specialist at a tribunal.
For any further information or advice, please call us on 01163 800 400 or email us.