IR35 is perhaps the biggest change in taxation for contractors and professional services companies in the last 20 years. Employers will be responsible for determining a contractor’s employment status, and each role must be individually determined.
WHAT IS IR35?
IR35 legislation was designed to assess whether a contractor is a genuine contractor rather than a 'disgused' employee, for the purposes of paying tax.
In simple terms, this occurs where an individual, who for all intents and purposes, would be an employee of an end user “client” but who operates through an intermediary vehicle such as a personal services company (PSC) to avoid income taxes and to manipulate national insurance contributions. IR35 comes into effect on the April 6th 2020.
WHAT CHANGES WILL THE LEGISLATION BRING?
We've compiled a factsheet detailing the changes that the legislation will bring and the options available to you, from PAYE through to SOW solutions through our consultancy arm, ECMS.
FACTORS TO DETERMINE WHETHER YOUR CONTRACTORS ARE INSIDE OR OUTSIDE OF IR35
There are a number of important factors that need to be considered in order to determine whether a role falls outside IR35 and is compliant with off-payroll working reforms.
MUTUALITY OF OBLIGATION: This is a key test to determining whether a contractor is truly self-employed. Can the contractor, as the worker, accept and reject work? As a contractor, can they decline an assignment or a piece of work. If mutuality of obligation exists, they could fall outside of IR35.
SUBSTITUTION: Does the role allow for the contractor to substitute themselves, at their own cost? For example, if the contractor is taking time off for medical reasons, can they send someone in their place, at their own cost. If they can’t send someone else, they could be within IR35.
SUPERVISION & CONTROL: A contractor agreement that specifies terms like mandated hours they are required to work, is one that points towards employment (inside IR35) rather than self-employment. If they are providing services for the agreed job but also working on different tasks, the contract could be outside of IR35.
PART & PARCEL: If contractors are embedded in the company structure this is more employment rather than self-employment, and therefore likely inside IR35.
WHAT ARE MY IR35 OPTIONS?
DEEMED MODEL: The contractor can remain a contractor and can remain as the director of their PSC (Personal Services Company), but for this particular assignment, is “deemed” inside of IR35, and the “fee payer” then has to withhold the appropriate taxes.
PAY AS YOU EARN (PAYE): Contractor can convert to become a PAYE engaged individual.
UMBRELLA: The contractor becomes an employee under an umbrella company, and the umbrella company withholds the appropriate taxes, thus mitigating IR35. It is likely you are engaging contractors through an umbrella already.
REMAIN OUTSIDE OF IR35: There will be a portion of the contractor population that will be deemed outside of IR35 and remain as the director of their PSC.
STATEMENT OF WORK (SOW) SOLUTION: If a piece of work can genuinely be delivered through milestone and deliverable based outcomes, then SOW is a viable solution. Through our consultancy arm, ECMS, we are able to provide a SOW solution.
EXCLUSIVE ONLINE TOOL TO DETERMINE STATUS
We have partnered with specialist IR35 legal advisers to provide a tool, exclusively to Eames clients, to help you assess the status of your contractor workforce.
The tool has been developed with a reputable legal firm in line with HMRC case law
Designed to address the gaps in the CEST tool, and is considered more accurate for determining status
Simply answer a moderate set of questions and get an "inside/outside" determination
The tool automates the whole process and provides the required audit trail
Provided the information used by the client to answer te questions is fully accurate, then the decision is insured up to £75k per contractor (by Markel), so there is peace of mind in the event of an investigation by the HMRC