IR35 is a hot topic of conversation in the payroll world and we can’t help but stumble across heaps of articles that tend to bend the truth or are sculpted by the rumour mill! So we’re here to debunk.
Here are the top 10 most common IR35 myth busters that are gracing the online world as we speak;
1. IR35 is new.
Unless 20 years grants you as new, unfortunately this is very much a myth. Although there has been several reforms to tighten the rules - 2017 in the public sector and April 2021 in the private sector - IR35 has surprisingly been around since the year 2000!
2. IR35 will probably just blow over!
As payroll experts, we would not bet on these odds, so don’t be caught out!
3. Contractors can provide end hirers with their own determination of their tax status.
If only it was that easy! HMRC have indicated that an end hirer relying solely on a contractor’s IR35 status determination would not demonstrate reasonable care and would leave the end hirer liable. It is therefore essential that the end hirer to make the assessment.
4. If a contractor is found to be inside IR35 for one client, it must mean they are working inside IR35 for every client.
IR35 status is assessed on a case by case basis - making each assessment different. This allows for a contractor to have multiple clients; where some projects will be inside IR35 and others may be outside IR35. The important distinction is that HMRC is assessing the overall engagement not the individual.
5. When a contractor is found to be inside IR35, going PAYE is their only option.
PAYE is most certainly an option, but by choosing PAYE Umbrella at Bar2, you will be entitled to the following additional benefits….and still comply with HMRC!
- Holiday pay
- Pension contributions (employer and employee)
- Statutory sick pay
- Paternity/Maternity pay
- Freedom to contract with many clients, with one ‘employer’, for all your contracts
- Payslips for proof of income such as credit or rent/mortgage applications.
- Financial peace of mind– Tax and NI will be automatically deducted for you every payroll so there will no nasty surprises
- Flexibility – No fee’s when you’re not working
- Simplicity - No annoying Limited Company admin like Tax returns, VAT, bookkeeping, HMRC or Companies House submissions to name a few…!
- Friday payments
- No IR35 implications
6. Contractors need to close their personal service company (PSC) in order to work through an umbrella company
Every contract is different and requires a fresh CEST assessment, however keeping your PSC open can allow for much more flexibility. You can still have an open PSC and be paid via an umbrella company for engagements that are deemed to be inside IR35. You can of course in the future look to close your PSC if every engagement is falling inside, but you do not need to close your PSC immediately to allow payment via other compliant models.
7. HMRC are going to investigate employees who were previously outside IR35 who now find themselves within IR35?
HMRC have issued a commitment that a contractor's employment status under the new rules will not be used to consider their historic IR35 position under the Chapter 8 rules unless they suspect there has been fraudulent behaviour.
8. If I am ‘inside IR35’, am I operating illegally?
No. It is not illegal for your contracts to be ‘within IR35’; you are not going to jail. Being inside IR35 is considered tax avoidance rather than tax evasion, the latter being the illegal one of the two.
9. I have paid a third party IR35 specialist for a “determination” and they say I am outside, or if some parts of the contract are changed I will be.
HMRC now places the onus on the end hirer or agency to decide whether a contract is inside or outside IR35. If an end user accepts a determination from a contractor, whether it's via a third party or not, HMRC will deem that to be a lack of care/due diligence. In short you may have just wasted money paying an expert to make a determination on an engagement they have no direct responsibility for and that can not be accepted.
10. I have added a substitution clause into my contract so I am automatically outside IR35.
It is no longer sufficient to simply insert a substitution clause into your written contract to get around IR35. HMRC requires proof that there is a real and genuine ability to send someone else (a substitute) to do the work instead of you. There are other factors and questions of the engagement which determines the decision, and not just one element such as the substitution clause.