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 currently applies to contractors operating within the public sector – but from April 2020, it will be extended to the private sector too.
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.
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 firstname.lastname@example.org