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Tax Status - Are you on the right side of the law?

HR advice

1. IR35 Meaning

IR35 refers to the UK’s off-payroll working rules, originally announced in a press release in 1999. It aims to determine if a contractor is genuinely self-employed rather than a ‘disguised employee’ for tax purposes. This distinction is crucial as it impacts how contractors are taxed and their eligibility for certain benefits.

2. IR35 Rules Tackle Tax Avoidance through Off-Payroll Working

The rules target tax avoidance by identifying contractors working as ‘disguised employees’—those who work through a limited company to enjoy tax efficiencies despite their working arrangements resembling employment. This also benefits employers by saving on National Insurance contributions and employee benefits.

3. How IR35 Rules Work in Practice

IR35 applies if a contractor, without their limited company (or another intermediary), would be considered an employee. The rules consider each contract individually, assessing factors like supervision, direction, and control to determine if the contractor is inside or outside IR35.

4. IR35 Changes: April 2021

In April 2021, significant changes were made to IR35 in the private sector, aligning it more closely with the public sector. These changes shifted the responsibility for determining IR35 status from contractors to the clients in medium-sized and large businesses. Small businesses were exempt, leaving contractors to determine their own IR35 status.

5. IR35 2024 Changes

From April 2024, large and medium-sized businesses will be solely responsible for determining a contractor’s employment status. This shift aims to ensure fair tax treatment and prevent tax avoidance. It could also mean more consistent tax treatment for contractors, addressing concerns over misclassification.

6. IR35 Rules: Am I Compliant?

Compliance hinges on whether a contract is for services rather than employment, with key factors including supervision, direction, control, substitution, and mutuality of obligation (MOO). Contracts must reflect actual working practices to be considered outside IR35.

7. Supervision, Direction, Control

To be outside IR35, contractors should have autonomy over how they complete their work. Excessive oversight or requirements to work specific hours may indicate employment, placing the contract inside IR35.

8. Substitution

A contract likely falls outside IR35 if a contractor can send a substitute in their place. This ability to substitute indicates a focus on services provided rather than the individual providing them.

9. Mutuality of Obligation (MOO)

MOO refers to the obligation of the employer to offer work and the contractor to accept it. A lack of MOO, where contractors work on a project-by-project basis without obligation for further tasks, suggests self-employment.

10. Other IR35 Criteria

Other factors affecting IR35 status include the provision of equipment, financial risk, payment methods, integration into the organisation, exclusivity, the intentions of the parties involved, and the contractor’s business operations.

11. Business Insurance

Contractors should consider business insurance, including professional indemnity insurance, as it demonstrates a degree of financial risk and business operation, influencing IR35 status.

12. Legal Expenses Insurance for IR35 Investigations

Legal expenses insurance can cover the costs associated with an IR35 investigation, offering financial protection and support during the process. However, contractors should confirm the specifics of their policy coverage.

Given the complexity and potential consequences of IR35, it’s advisable for contractors to seek professional advice to ensure compliance and to understand the implications for their business structure and tax obligations.