This was particularly prevalent in the IT industry, and summed up in the ‘Monday to Friday’ phenomenon – where a worker left the office on Friday as an employee, and returned as an independent contractor on Monday with no change in duties or responsibilities.
HMRC saw this as depriving the exchequer of tax revenue. Consequently, IR35 legislation allows HMRC to see through the Limited company structure – where a worker is considered a disguised employee, they must pay tax and National Insurance on their income at the same rate as a permanent employee.
IR35 applies to all contractors working through their own limited company. It was first implemented in the public sector (off-payroll rules) in April 2017 and was extended to the private sector in April 2021.
The responsibility for assessing the status shifted away from the contractor, under the old rules, to the end client/hirer under these new rules.
How do I know if I’m caught by IR35?
Although there are many factors to consider in order to determine your IR35 status, the three main considerations are:
Supervision, direction and control – Are you under the direction of somebody else during the performance of your duties? If you have a manager or supervisor, or if you can be instructed to work at certain times or in certain ways, you’re likely to be considered a disguised employee.
Substitution – Are you personally required to complete the contract, or can you substitute another individual to complete the work? If you can’t send somebody in your place, there’s an implication of employment.
Mutuality of obligation – Do you have to accept work that is offered to you. Does the company engaging you have a duty to provide work? If so, you’re likely to be considered within IR35.
What does this mean for contractors?
It’s common for contractors to operate their own Limited company to handle contract income – there are several tax advantages to doing so, so a higher proportion of your gross income will end up in your pocket.
However, the additional tax burden imposed on contractors operating within IR35 means that this isn’t the case – the requirement to make a ‘deemed salary’ payment, which compels the company to pay tax, NI and Employer’s NI to HMRC at the end of the year, means that the tax advantages of the Limited company are lost.
In these situations, contractors often prefer to operate through an Umbrella company – the administrative burden is reduced compared to operating a Limited company, and take-home pay is usually slightly higher than when making deemed salary payments under IR35.
Small companies’ exemption
Under these new rules, and in all cases, the end-client/hirer is responsible for deciding whether the rules apply and whether the contractor is ‘inside’ or ‘outside’ the scope of the IR35 rules. However, with the introduction of the off-payroll/IR35 rules in the private sector, there is an exemption for small companies. This means that any company that satisfies two of the following criteria will not have the off-payroll rules apply to them, and therefore will not be responsible for assessing the contractor’s status:
- It has an annual turnover not exceeding £10.2m
- It has a balance sheet total not more than £5.1m
- It had an average of no more than 50 employees for the company’s financial year.
In ONLY these cases, the responsibility for assessing status remains with the contractor.
Does IR35 apply to Umbrella employees?
One of the advantages to working through an Umbrella company is that you don’t need to worry about IR35 – you’re already paid through the PAYE system and work under a contract of employment with the Umbrella. Since you’re employed by the Umbrella, ‘disguised employment’ ceases to be a concern.
If you’re working through the Dolan Contractor Group, you can choose to sign up to our sister company Dolan Accountancy and you will be able to use Contractor Umbrella margin free, if your contract is better suited to umbrella employment, so you don’t need to worry about your IR35 status when deciding whether to accept a job.
For a free assessment of the IR35 status of a contract, or if you’d like further information on IR35, please give us a call on 01206 591 000 or please email email@example.com
We have over 20 years experience, have won numerous awards and have helped tens of thousands of contractors. Our friendly, professional contract managers are experts in their field, so no matter the question, we’re sure we can help you.
Signing up couldn’t be easier – just click ‘sign up‘, provide us with some basic details and within 24 hours your online employment file will be activated. We’ll also send you a comprehensive and straightforward employee starter pack and you will be contacted by your personal Contract Manager.