IR35 – which was introduced in 2000 – has recently been a hot topic in the news, thanks to several high-profile lawsuits. One of these was Christa Ackroyd Media Ltd v HMRC, the adjudication of which determined that the former BBC presenter Christa Ackroyd was inside of IR35 – and as such owed HMRC income tax and NI contributions of over £400,000. But what is IR35?
The IR35 legislation was designed to identify workers known as ‘disguised employees’: an attempt to combat a growing trend that saw companies paying workers as contractors and therefore ‘off-payroll’. This setup allows contractors to avoid PAYE tax deductions and NIC contributions.
How to Assess Whether a Contract Falls Within IR35
Unless the contractor in question is operating under an umbrella company or via a recruitment agency, the IR35 rules may well apply. To make things clearer, HMRC has developed an online tool for assessing whether a contractor should be treated as an employee (you may also wish to seek advice from a tax adviser or employment lawyer).
However, when trying to work out whether a contract is one of employment (i.e. a contract of service) or self-employment (i.e. a contract for services), there are a few key considerations:
- Control. A contractor should have control over their working hours, practices, and how/where the work is completed. If the employer dictates any of these terms, this is an indication that the contractor should be treated as an employee for tax purposes.
- Substitution. Much of the debate around contract of service vs. contract for services depends on the idea of ‘personal’ service. A contractor should not necessarily be required to carry out a particular service in person, whereas an employee would be. As such, a contractor may be within their rights to send a substitute worker in their place to carry out the contracted task, provided they cover any necessary expenses (such as for training).
- Mutuality of Obligation. Under the terms of an employment contract, an employer and employee have several mutual obligations – one of which is the obligation to offer work (employer) and the obligation to accept it (employee). This obligation does not exist as part of the employer/contractor relationship. If it appears that an employer is offering a contractor continuous work – rather than work for a fixed period – this could be taken as a strong indication that the contractor should be treated as an employee for tax purposes.
Inside IR35: What Happens Next?
Should HMRC believe that your contract is not sufficiently distinct from that of a standard employee agreement, you will be subject to PAYE deductions and NICs. A number of penalties can also be charged to make up for any tax and NI contributions you may owe, including:
- Interest levied on outstanding tax/NICs.
- If HMRC believes that you have been ‘careless’: you may be charged an additional penalty of 30 of the underpaid amount.
- If HMRC believes that you avoided making the necessary payments deliberately: you may be charged an additional penalty of 70 of the underpaid amount.
- If HMRC believes that you had full knowledge of being inside IR35 and then tried to conceal the existence of underpaid tax/NICs: you may be charged an additional penalty of 100 of the underpaid amount.
IR35: Changes are Coming
The Autumn 2016 budget detailed a number of changes to the IR35 legislation that have already taken hold; and, with more changes afoot (the government recently opened a consultation on proposals to extend IR35 off-payroll working in the private sector, for example), questions continue to arise about the viability of contractors and the nature of self-employment.
Some of the changes that have already been implemented include (but are not limited to):
- Tax free allowance. Historically, if your contract was deemed to fall inside IR35, you were granted a 5 tax free allowance in order to cater for business expenses – meaning that you only had to pay 95 of the outstanding amount. This allowance has now been abolished.
- Public sector contractor status. From April 2017, the responsibility for determining the IR35 status of a contractor shifted from the worker (or public service company [PSC]) to the end client (the agency or employer that employed them). As a result, the onus is on the employer to undertake the necessary checks and make the required changes to ensure compliance – even if this represents an additional project cost.
IR35 is a complex piece of legislation – and, with further changes on the horizon, it’s more important than ever that companies seek expert tax advice. IBISS & Co are on hand to offer specialist support to small companies and contractors alike. Whatever the future holds, there are still ways to ensure that operations can continue efficiently and effectively – and the inventive strategies devised by IBISS & Co’s experienced team will safeguard your business in 2018 and beyond.