IR35 and contractors
If you are considering becoming a contractor, currently working as a contractor, or owning a business that hires contractors, IR35 is something you should be familiar with and understand.
Continue reading as we examine IR35 and off-payroll legislation and what it means for contractors.
Overview of IR35
Inland Revenue 35, also known as IR35 or the “Intermediaries Legislation”, is a set of off-payroll working rules for intermediaries, contractors and companies in the UK. IR35 is a UK tax legislation designed to identify contractors who avoid paying the appropriate tax by providing their services through an intermediary and working as ‘disguised employees’. IR35 also aimed to identify businesses engaging workers on a self-employed basis to ‘disguise’ their actual employment status.
Contractors working via an intermediary such as a Personal Service Company (PSC) can take advantage of a range of tax reliefs to offset their tax bill. They can also earn income through a combination of salary and dividends, allowing contractors to pay lower rates of Income Tax and National Insurance compared to regular employees. Therefore, becoming a director of a PSC (also referred to as a limited company) is a much more tax-efficient way to operate as a contractor compared to contracting via an umbrella company or employee of a company.
However, HMRC deemed that too many individuals were taking advantage of this tax loophole and avoiding paying the correct amount of tax and NICs. Therefore, HMRC brought in IR35 as they believed that many of these individuals would have been employees if not for the PSC arrangement and, thus, should be paying the same income tax and NICs as employees. IR35 aimed to level the playing field and remove this unfair tax advantage.
Off-payroll in the public and private sector
When IR35 was first introduced, it was the responsibility of individual contractors to assess their own IR35 status. Where IR35 was applicable, the limited company or agency was responsible for accounting for any tax and paying it to HMRC.
The rules changed in 2017 when HMRC introduced off-payroll in the public sector. As part of the reforms, it became the responsibility of the public sector body engaging the contractor to determine the contractor’s IR35 status. At this point, responsibility remained with the contractor in the private sector. From 2017 onwards, if a public sector worker is deemed inside IR35, it also becomes the responsibility of the fee-payer (usually the recruitment agency or umbrella company) to process the worker’s tax deductions (Income Tax and National Insurance) and pay these to HMRC on the worker’s behalf before making a net payment to the contractor.
In April 2021, off-payroll in the private sector was brought in to make things more uniform between the private and public spheres. Just like in the public sector, determining the contractor’s IR35 status now lies with the medium or large private sector client engaging them, and the fee-payer must deduct the taxes at source and pay these to HMRC. The only exception to the off-payroll working rules is if the private sector client has no UK presence and is based entirely overseas or if the private sector client meets the criteria for the small business exemption. The legislation also made the engaging business liable should HMRC decide a status had been incorrectly assessed.
What is a Status Determination Statement (SDS)?
As part of the off-payroll reforms introduced in 2021, the end client must conduct a thorough IR35 assessment of every contractor they engage and declare the IR35 status by issuing a Status Determination Statement (SDS). An SDS is a document that states the IR35 status assessment of the worker (either inside or outside IR35) and the reasons for the outcome of the assessment. If the contractor is inside IR35, they must be paid via PAYE, but if they are outside, they can operate via a limited company and receive a gross payment for the assignment.
An SDS must be produced for each worker and each contract, and a new SDS must also be issued if the working practices or terms of the engagement change mid-way through a contract. The SDS will also be shared with the rest of the supply chain (for example, the umbrella company or recruitment agency), as the fee payer must also be made aware of the status determination. The only exception to the rules is small private sector clients who are not responsible for deciding the IR35 status of the workers they engage.
Inside IR35 or outside IR35 – what does this mean?
Operating inside IR35 means that, following a status determination, the terms of your engagement are similar to those of a permanent employee. You must also pay the same taxes as a permanent employee (Income Tax and National Insurance), and the fee-payer will deduct these taxes and pay them to HMRC before making a net payment to your bank account for the work completed.
If, following a status determination, you are found to be operating outside IR35 and are engaged on a genuinely self-employed basis. You can become a limited company director and get paid gross for the assignment. Operating via a limited is one of the most tax-efficient ways to work as a contractor, as you can pay yourself a salary and withdraw further income as dividends.
What happens if my contract is inside IR35?
If you are offered a contract that is inside IR35, there are a couple of options:
- Continue using your limited company – You can continue using your limited company for assignments inside IR35 and accept the lower take-home pay you will receive. The fee-payer (end client or agency) will deduct income tax and national insurance, and you will receive a net payment for that assignment. Additional taxes will be due when you draw that income from the limited company. Please note that you cannot claim certain business expenses for assignments inside IR35.
- Look for an assignment outside IR35 – If you do not want to accept an assignment inside IR35, you can still find an outside IR35 assignment and negotiate your contracts accordingly.
- Negotiate a higher rate of pay – You could negotiate a higher rate of pay to compensate for any loss in take-home pay for accepting an inside IR35 assignment.
- Switch to umbrella – Switching to a compliant umbrella company is the easiest way to get paid. You will be paid via PAYE, and the umbrella company will deduct the required Income Tax and employee National Insurance and pay this to HMRC on your behalf. You will also benefit from employee benefits unavailable to you when contracting through a limited company.
Are you looking for a compliant umbrella company?
If you are looking for a compliant umbrella company, our sister company, Churchill Knight Umbrella, offers an FCSA-accredited and SafeRec-certified umbrella service for contractors inside IR35.
To learn more about Churchill Knight Umbrella’s PAYE umbrella service, please call 01707 871622 and ask to speak with Churchill Knight Umbrella. You can also request a tailored take-home pay calculation, and a team member will contact you to discuss the service with you.
What happens if my contract is outside IR35?
If your assignment is outside IR35, you can continue to use your limited company for your outside IR35 assignments. If you want to set up a limited company or would like to switch from your current accountant, our FCSA-accredited accountancy service is perfect for you. Churchill Knight & Associates Ltd’s limited company accountancy service is a very popular choice for contractors and freelancers in the UK and includes the following as standard:
- Company incorporation within 24 hours (if required)
- Payroll and RTI
- Bookkeeping
- Registration for PAYE, VAT and Corporation Tax
- Dividend documentation support
- Quarterly VAT returns
- Mortgage and visa references
- Payroll and RTI for an additional employee
- Assistance with all HMRC correspondence
- Assistance with bank account set-up
- Year-end accounts
- 24/7 access to a secure, mobile-responsive client portal
- Dedicated account manager
- Unlimited phone and email support
Churchill Knight & Associates Ltd also offers a more comprehensive service for contractors requiring more accountancy support. This service includes everything listed above, as well as:
- Director’s Personal Tax Return
- Quarterly management accounts
- Confirmation statement filing
- Year-end accounts completed within three months
Contact us today to discuss your requirements
To learn more about our limited company accountancy services or to register with Churchill Knight & Associates Ltd, please call 01707 871622. You can also schedule a consultation for a time that suits you, and a team member will contact you to discuss your accountancy requirements.
Our dedicated self-assessment tax department processes thousands of tax returns for UK taxpayers every year. If you need to submit a self-assessment, contact us today for a competitive quotation or call our friendly sales team on 01707 871622.
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