We understand that IR35 determinations can be confusing, so we’ve made things that little bit easier by creating this useful blog which covers everything you need to know about IR35 for contractors, including what IR35 is and what it means to be Inside IR35 or Outside IR35.
First things first – What is IR35?
IR35 - also known as ‘Intermediary Legislation’ or ‘Off Payroll Tax’ - was introduced in April 2000 in order to combat tax avoidance through the misuse of personal service companies (PSCs).
The IR35 legislation is designed to ensure that contractors operating through limited companies (but working like employees) pay broadly the same amount of tax as they would if they were employed. Working as a contractor is often more tax efficient than working as an employee of a company, so the government is using IR35 to remove what is deemed an unfair advantage, and at the same time increase its overall tax revenue.
The government made IR35 changes to the public sector in 2017 and reformed the legislation for the private sector in April 2021, resulting in the responsibility of IR35 determinations being placed with the end client.
When undertaking an IR35 assessment, there are two classifications: inside IR35 or outside IR35.
What is Inside IR35?
Inside IR35 means that you must pay the same tax as a permanent employee.
What is Outside IR35?
Outside IR35 means that you must pay the correct amount of tax to avoid fines from HMRC.
When would a contractor be Inside IR35?
A contractor is deemed Inside IR35 if:
- The end client’s IR35 assessment states that IR35 applies to their assignment – in this case, they will be given a Status Determination Statement (SDS) which is a written confirmation of their employment status following the assessment.
- It’s established that they would be employed by the end client or agency as an employee if it wasn’t for their Limited Company
- The service they provide reflects a ‘service of employment’ rather than ‘self-employment’. For example, if they are under a service of employment, then their employer is in charge of their workload, and they're required to regularly work unless they're on leave.
When would a contractor be Outside IR35?
A contractor is deemed Outside of IR35 if:
- They are operating as a genuine business
- They have received an ‘Outside IR35’ SDS by their end client
- Following consideration of the agency to client contract, their contract, working conditions and SDS assessment remains outside IR35
- They are not being placed under supervision, direction and control on their assignment (in simple terms, they don’t have anyone overseeing their work, providing them with instructions or advice, checking that their work is of a certain standard or even placing them on another job)
- Mutuality of obligation does not exist (put simply, the client does not hold the responsibility of providing them paid work, and they are not obliged to accept and complete the work)
- There is no requirement for a Personal Service Company, and they carry out the work themselves
- There is no indication that they are part and parcel of the client’s organisation (in other words, they do not play an integral role within a client’s business)
What are the impacts of an Inside IR35 determination?
If a contractor is placed Inside IR35, they:
- Are required to pay National Insurance Contributions (NICs) and Income Tax on their earnings
- May be liable to make a ‘deemed payment’ to HMRC at the end of the tax year and therefore may require professional support in doing so due to the complexity of the calculation.
A deemed payment is a payment which is made to HMRC when you are operating inside IR35, to account for the extra tax and national insurance which is due on an assignment where the IR35 legislation applies (Qdos Contractor).
You are liable to make a deemed payment if you are engaged by a small private sector client.
You are not liable to make a deemed payment if you work in the public sector or work inside the rules for medium and large companies in the private sector
(your fee payer will work this out on your behalf and deduct the NICs and Income Tax from your invoice before paying you).
- Are required to pay tax at the same rate as an employee (as they are considered an employee for tax purposes)
It’s important to note that although they will pay tax at the same rate as employees, they are not automatically entitled to employment rights as tax and employment legislation are separate from one another.
What are the impacts of an Outside IR35 determination?
If a contractor is placed Outside IR35, they are responsible for:
- Ensuring all their personal and company taxes are calculated correctly
- Making sure that their taxes are paid on time, in line with any deadlines. For example, completing a Self-Assessment tax return by the required annual deadlines.
What is the HMRC CEST Tool?
HMRC’s CEST (Check Employment Status for Tax) Tool is an online questionnaire created by HMRC which is designed to help hirers, agencies and workers determine the employment status of a self-employed individual and helps make the decision as to whether the off-payroll working (IR35) rules apply to a contractor or not.
Benefits of using HMRC CEST Tool:
- Free of charge for the hirer, agency or worker to use
- The tool is readily available on the HMRC website
- HMRC will stand by the result as long as all information provided is accurate
Disadvantages of using HMRC CEST Tool:
Although the HMRC tool is free, readily available and claims to honour all determinations, there are also many limitations that end clients and agencies should be aware of including;
- Mutuality of obligation (MOO) ignored – Case law regarding MOO in both recently won and lost cases, has indicated the importance and relevance of considering MOO when deciding on a contractors IR35 status. For reason’s unbeknown, HMRC have decided to not include a MOO section or questions within the CEST tool.
- Limited flexibility in reviewing and monitoring – The CEST tool does not offer flexibility, or the complexity required for additional monitoring or reviewing of the contract or assignment in question. For example, monthly check ins to identify if the assignment or working conditions have changed at all, which could in turn affect the IR35 status.
- Limited collaboration – The hirer, agency or contractor can only undertake the CEST tool individually, denying the ability for important question’s to be answered collaboratively to enable a clearer picture of the contract and working conditions (e.g information such as the workers responsibilities, who decides what work needs to be done, who decides when or how work is done and how the worker is paid etc will need to be clear and determined before undertaking the questionnaire) .
- Full picture not considered - The CEST tool will not ask all questions or sections due to the question skip logic used. It’s dependent on the answers inputted, meaning the whole picture is not always taken into account.
- Requirement of expert resources – A large number of companies will not have the expert resources within their business readily IR35 trained and equipped to understand and navigate the important question’s being asked by the CEST tool.
IR35 Assessments
Knowing whether a role sits inside or outside IR35 isn’t often as black and white as it should be. Our IR35 Assessment service offers guidance as well as quick and easy IR35 checks to give definitive answers.