IR35 is designed to assess if a contractor is self employed or really an employee trying to hide from paying the full appropriate amount of tax owed. Legislation for IR35 was introduced in April 2000 to prevent tax avoidance. Many people seem to think it is very complicated but there a few basic rules to stick to that may avoid problems, however, there is no guarantee with HMRC. Any contractor subject to a tax investigation may face months of intrusion whilst their accounts paperwork is sifted through and examined.
The principles of IR35 that determine if you are a genuine contractor or a “hidden” employee are based on control, substitution and mutuality of obligation.
Control means just that. If the company taking on the contractor dictates quite clearly how the contractor must work in terms of hours, duties, venue, etc then it the contractor could be deemed to be an employee. If there is flexibility for the contractor to work as they please using their own equipment then they may be able to show they are not an employee and outside of IR35.
Substitution also means just that. If the contractor has the ability to substitute another contractor in their place at any time then IR35 may apply to the working relationship.
Mutuality of obligation means that although the company may offer work the contractor has the ability to turn it down. The company also does not have to offer any work. With such a relationship IR35 may not apply.
A contractor working outside of IR35 will take the financial risk of not getting paid. They should be invoicing the company and dealing with their own tax and national insurance. They should be able to work for any number of companies and not working exclusively for just one company.
With any working relationship it is important to have an agreement in place that includes the above clauses.
In April 2017 the public sector was expected to identify which contractors in their employer were inside or outside of IR35 and issue the appropriate documentation ie an employment contract or a sub contractor agreement. The onus was on the public sector bodies to do this and ensure the tax set up was correct. Many public sector bodies will only accept contractors working through an umbrella company who take care of the tax obligations. Umbrella companies and agencies providing contractors to public bodies could also be liable if IR35 is not managed correctly.
In April 2020 this obligation will be introduced for the private sector.
For a contractor it may be about risk assessment. Whilst the onus is on employers to get this right sometimes things can go wrong so it’s important for a contractor to take responsibility for their own tax affairs, as always, and aim to get this right. Contractors that get it wrong could end up paying the tax owed plus penalties and interest.