The IR35 legislation has been in place for nearly two decades, but significant changes are expected. For example, from 6th April 2021, the rules now apply to the private sector, whereas previously, it only affected the public sector. Through IR35, HMRC is investigating individuals suspected of avoiding tax by working under a limited company, and if found guilty, they will have to pay the owed monies to the government.
What Exactly Is IR35?
IR35 is a tax legislation in the UK that is colloquially known as the ‘Intermediaries Legislation’. It was first introduced in April 2000 and is so named after the original press release published by Inland Revenue (now HMRC) that announced its creation. Its purpose is to tackle the issue of off-payroll working by identifying contractors and businesses that are avoiding paying the appropriate tax by disguising their employment status as self-employed.
HMRC examines each individual’s contract and workspace to determine whether they fall inside or outside IR35. If a contractor is found to be receiving the same benefits as a full-time employee or is being treated as one, they will be deemed ‘disguised employees’ and may be suspected of tax avoidance.
From now on, responsibility will be shared equally between the contractor and the end-user client, meaning that any unpaid tax can be collected from both parties in case of an error. Organizations only need to determine whether the rules apply to contracts that they plan to continue beyond 6th April 2021. If a contractor is suspected of being inside IR35, they should be prepared for investigation by HMRC, and any owed tax from the past six years will be claimed back by the government.
How Do You Determine If You’re Inside IR35?
Determining whether you fall inside or outside of IR35 will affect your tax and national insurance obligations. To help contractors who are unsure of their IR35 status, HMRC has created an online tool called CEST. If you receive benefits such as sick pay, holiday entitlements, or if you’re treated like a permanent employee, you’re likely inside IR35.
HMRC considers various factors to test your IR35 eligibility, such as substitution, control, mutuality of obligation, and financial risk. If your employer has the option to send a substitute to replace you, or you have financial risk, you’re likely outside IR35. However, if your employer controls your workload and the way you carry out your work, you’re likely inside IR35.
Who Determines Your IR35 Status?
End user clients now bear the responsibility of determining and compensating for contractors who may be classified as “disguised employees” rather than the contractor’s intermediary as well as deal with CJRS matters. Currently, in the public sector, the responsibility of determining whether a contractor falls inside or outside IR35 lies with the client, whilst in the private sector, this responsibility is placed on the contractor.
Through this setup, if your company or you are investigated by HMRC and discovered to be operating inside IR35 despite your claim that you are not, both the contractor and the end user client will be held accountable and required to pay any outstanding taxes from the six-year period prior to the investigation.
These adjustments are implemented to guarantee that both parties are paying the correct amount of tax and National Insurance to the government and that future employment contracts are thoroughly reviewed by both parties involved. Placing the responsibility on both the employer and the end user client necessitates careful consideration by all parties involved.
What Role Does HMRC Play in This Legislation?
If HMRC questions a contractor’s status and determines that they are working outside of IR35, an IR35 enquiry may be initiated. HMRC will request evidence that the contractor is working outside of the legislation, and if they find the evidence insufficient, they will conduct an in-depth review of the working practices and written contracts.
Based on this review, a final decision on the contract status will be made. If it is concluded that the contractor is operating inside IR35, HMRC will demand retrospective income tax and NIC payments, in addition to interest and a possible penalty.
HMRC retains the right to investigate the arrangement of contractors at any time, which can be a lengthy, costly and stressful process. They can also scrutinize past contracts dating back up to six years to determine whether or not the legislation should have been applied.
What Are the Responsibilities When You’re Inside IR35?
Operating ‘inside IR35’ signifies paying taxes at the same rate as an employee, which could also entail being entitled to employee or worker rights such as minimum wage, maternity pay, and protection from discrimination. If you are discovered to be operating inside IR35, you will likely have to make a deemed payment of income tax at the end of the tax year to account for tax deductions or NIC that an employee would have made.
This entails adherence to the PAYE system, with appropriate deductions from your monthly pay. Similarly, your end-user client must match national Insurance Payments to the government, and any erroneous payments will hold both parties liable.
In the public sector, the agency or hiring body will make national insurance and income tax deductions from your pay, whilst in the private sector, your employer is responsible for determining whether you fall under IR35 as per the off-payroll rules. Failure to provide correct information to HMRC can result in the employer being charged for monies owed to HMRC.
For both the end-user client and contractor, determining the right IR35 status and paying the right taxes and NICs are crucial to avoid penalties by HMRC, and if they are not that familiar with the legislation, it’s easy to make mistakes. This is where the help of tax experts is most valuable. Legend Financial has been handling a lot of clients dealing with this legislation and have garnered loyal clients over time. Reach us today for your accounting, taxation, and business management matters!