Hubbado is helping UK companies navigate IR35

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What is IR35

IR35 is a tax anti-avoidance rule designed to combat “disguised employment” in situations where an individual contractor is providing personal services (their labour) to an end-user via their own intermediary such as a personal services company (PSC). IR35 applies when the contractor would be an employee (or officeholder) for tax purposes if they were hired directly by the end-user. If IR35 applies, PAYE and NICs must be applied in respect of the fees paid to the PSC.

The proposed IR35 reforms for the private sector, now planned to take effect from April 2021, represent the biggest change to employment tax for decades. New IR35 legislation is designed to crack down on ‘disguised employment’ by reclaiming what HMRC sees as lost tax and national insurance contributions. The Treasury expects the new IR35 legislation to net circa £1.1 billion in the first year alone.

Until April 2021, businesses in the private sector can engage contractors using personal services companies (or other intermediaries) without having to give too much thought to the contractor’s status for tax purposes. This will change for large and medium-sized private-sector businesses under the proposed IR35 reforms. The reforms will switch the responsibility for determining a contractor’s status and, if appropriate, operating PAYE and National Insurance contributions (NICs) from the personal services company to the end-user business.

If you are a client that hires contractors, or a contractor or freelancer working through your own limited company in the UK, then you need to be aware of the new off-payroll rules as these can have a big impact on payments, tax and national insurance.

Contact our IR35 experts

Recent IR35 news

The IR35 road ahead survey suggests that over half of UK firms are still not ready for IR35...

With just 4 months to go, half of hiring firms in the UK still haven't adopted a compliance protocol, and just 3% of contractors trust CEST to accurately reflect status law...
Read article

Keeping control keeps IR35 away from contractors...

This is a good read that breaks down the concept of control in IR35, with some actual case law and outcomes
Read article

Important dates for IR35

Before 6th April 2021

  • Under pre-April 2021 IR35 rules, the contractor is responsible for assessing whether IR35 applies and, if so, operating PAYE and NICs on the fees the PSC receives (excluding VAT) less certain statutory deductions
  • HMRC can check at any time for ‘disguised employment’.
  • If HMRC decide that IR35 does apply, monthly payroll taxes and employee national insurance will need to be paid, but without any of the protections & benefits an employee might expect.

After 6th April 2021

  • Businesses (the End-User) fulfilling certain conditions (see below) will be responsible for assessing contractor employment status that is, whether IR35 applies or it does not. This is called a Status Determination Statement
  • If the assessment concludes that the contractor is out of scope of IR35, the PSC can continue to be paid gross.
  • If the contractor is assessed as within IR35, the fee payer is responsible for operating PAYE and deducting employee NICs on the fees it pays to the PSC (excluding VAT). The fee payer must also pay employer NICs.

FAQs

How is IR35 status determined?

Generally, the End-User should take the following into account:

  • control and working arrangements: how much direction does the End-User have over contractor?
  • substitution: can the contractor send a substitute?
  • integration: how involved is the contractor on the business?
  • risk: does the contractor carry on business on their own account; do they take financial risk? and
  • control: how control much can the End-User assert over the contractor?

Here are some general factors to be considered where status determination is required:

Being in business as a contractor: Contractors should show evidence of their own financial risk and being in business for themselves rather than their clients. Contractors should aim to show as many of the following proofs of business on their own account as possible, as showing just one or two many not be enough for HMRC:

Company names: Contractors should never name their company after themselves, instead they should use a business name that reflects the work being done e.g. ABC Engineering and suggests that it is not necessarily a one person company.

Multiple clients: If possible, contractors should try to split their time fairly between two or more main clients, this makes it harder for HMRC to claim that the contractor is an employee of any of them.

Marketing materials: Contractors should be able to demonstrate their own marketing materials to engage new clients e.g. a website, listing on a relevant services website, or business cards. Branding should be never look similar to client branding.

Company insurance: having their own company insurance like professional indemnity insurance, is a good way for contractors to demonstrate that they are not an employee.

Office space: Having an office, even one in their own home, software licences and professional memberships in the contractor company name implies that the work carried out extends beyond the current client.

Professional development: Paying for their own training is another way for contractors to demonstrate that they are in business on their own account.

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What is the status determination statement?

  • The End-User must take reasonable care in making that assessment and confirm its assessment together with reasons in what is known as a Status Determination Statement (SDS).
  • The End-User must provide the SDS to the contractor before making the first payment to them.
  • If there is an agency in the chain, the SDS must also be provided to the agency.
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How does IR35 affect my UK business?

The new rules apply to this businesses where two of the following conditions are satisfied:

  • annual turnover of more than £10.2 million
  • balance sheet total of more than £5.1 million
  • more than 50 employees

Small private-sector end-users will be exempt from the new rules and will not be required to determine whether IR35 applies. In this scenario, the contractor/PSC will remain responsible for determining whether IR35 applies and the fee payer can still pay the PSC gross.

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How does IR35 affect me as a UK contractor?

  • The changes affect individual contractors using a PSC to provide their labour.
  • Contractors will not be affected by IR35 if they supply their labour directly to the End-User without using a PSC.
  • It is expected that contractors accepting a new assignment are likely to want to know in advance whether they will be assessed as within the scope of IR35.

Please note, it is still legitimate for contractors to use PSCs.

Contractors who are not tax resident in the UK and who are supplying their services exclusively outside the UK are unaffected.

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How does IR35 affect me as a UK agency contractor?

  • If there is a UK-based agency involved, the End-User retains responsibility for issuing an SDS. It must provide the SDS to the agency as well as the contractor and the agency must also be allowed to appeal against the assessment.
  • Provided that IR35 is determined to apply, and it is a UK based agency which supplies the contractor via a PSC, the agency is regarded as the “fee payer” as it contracts with the PSC. As a result, the agency will have the obligation to operate PAYE/NICs and pay employer NICs.
  • The obligation to operate PAYE/NICs remains with the End-User if it fails to provide an SDS before the first payment is made. HMRC has power to transfer PAYE/NICs liability from the agency to the End-User if there is no realistic prospect of recovery from the agency within a reasonable period.
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How do I manage compliant IR35 contracts?

Well written contracts may insulate contractors from IR35 risk and set out a position which clearly avoids and employer and employee relationship, including:

  • Weekly minimum hours, pension arrangements or other benefits and subsidised services should not apply to the contractor
  • A duty to provide work for the contractor and a duty to accept it should be avoided
  • The contract should contain a right of substitution
  • The contract should not stipulate how work is to be carried out
  • Exclusivity clauses should be avoided, as should regular or guaranteed weekly or monthly payments, including retainers
  • Liability and indemnity provisions should be included
  • Termination provisions should be included, but only for breach of contract
  • Intellectual property should set out suitable demarcation
  • Insurances should be stipulated
  • Data protection controller and processor distinctions should be made
  • Where possible, employee-equivalent restrictive covenants should be avoided
Speak with an IR35 expert

Summary from our IR35 experts

It should be stressed that the changes in IR35 in April 2021 should not represent (as some have argued) an end to the use of self-determination by PSCs. Provided that End-Users act reasonably (and with care), thereby avoiding blanket determinations, there are a number of practical and contractual measures designed to preserve the contractor’s ability to determine their own status, which are set out above.

If you would like further clarification of any matter discussed here, please contact us, we will be delighted to help.

Hear from the IR35 Experts

A virtual Q&A on IR35 and umbrella services. Get an overview of the difference between PAYE, PLC and Umbrella services for IR35, and the effect on benefits and take home pay. Hosted by Hubbado and Paystream

Contact Paystream

Thomas Bennett, the founder of Henry & Co law firm, specialises in IR35 legal & contractual issues, offering options and advice for contractors on how to avoid IR35

Contact Thomas

Christian Faires, consultant at Forma, provides IR35 accounting and tax solutions to personal service company owners and directors. Chartered accountancy background and formerly Managing Director at a leading UK contractor accounting specialist firm.

Contact Christian

Stuart Juggins, founder of Aardent, advises & leads the recruitment industry on building & using effective and compliant solutions using SOW & interaction with IR35. Former roles as the Group Head of Solutions for Adecco, Experis & European Head of Professional Services for several global Systems Integrators.

Contact Stuart

IPSE's deputy director of policy and external affairs, Andy Chamberlain, spoke about leading the fight for freelancers and contractors against IR35 at all levels of government.

Contact Andy

More IR35 questions from our events

Is there a way to become PAYE via a limited company and operate inside IR35?

If you are an employee of a limited company receiving a PAYE salary and taxes and NI being deducted then IR35 does not apply. However, many mid to large corporate companies are dictating that inside IR35 roles can only be fulfilled via an umbrella organisation. Some smaller end clients may be OK for you to carry on using your limited company for inside IR35 as long as you can show all your income is going through PAYE but unfortunately this pragmatic approach isn’t very widespread at the moment.

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Do you have to be an employee? It looks like perm is the way to go for inside IR35 jobs

Just because a role is inside that doesn’t mean the end client will want to add to their perm staffing. Clients will still want access to a contingent workforce, they will still have projects that need completing and will still bring in external resources for a temporary period of time if their internal teams do not have the skills or capacity to deliver it. Then its up to the end client if we can make those roles outside or if their working practices mean the roles are inside.

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Does IR35 apply if I live and work in the UK, but my company is based abroad?

Same as above, in general terms if the contractor is paying taxes in the UK then they should always bear in mind IR35. Even if they are based in the UK but doing work for an overseas company HMRC can come along and investigate if you are a disguised employee. Where the end company is overseas makes it more difficult for HMRC to investigate and prove the working practices are inside IR35, but technically it could happen.

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Why are government organisations still hiring outside IR35? Are they subject to different rules?

End clients, including the Government, can still publish contractor roles as outside IR35 as long as the project requirements, the working practices and the contractor comply with being outside IR35. The public sector has been working under the current IR35 rules since April 2017 and, on the face of it, they have adapted to it fairly well. For now at least, the private sector looks like it's taking a risk averse approach and is more reluctant to publish roles as outside IR35.

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Is it worth remaining a contractor inside IR35?

From a net income point of view there is less value than there was previously, however, it should be noted that contractors will still have a higher earning potential than an equivalent perm employee.

A lot of other factors come into play depending on what your motivations are; greater variety of work, more control of work/life balance, more control of your own training path, freedom of taking long breaks in between contracts or being able to juggle two or three contracts at the same time – all activities that typically cannot be achieved as a perm employee.

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Which umbrella companies can we use with hubbado?

We are happy to work with most umbrella/payroll companies, as long as they can demonstrate and show they are deducting and paying the relevant taxes and NI when requested.

Some of our corporate clients do however have a preferred list of umbrella companies they want external consultants to work with.

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Can contractors join together to form a PLC to deal with clients inside IR35?

Presume this question is related to contractors forming a private limited company as a kind of alliance and not a PLC (a PLC, public limited company, can be formed but the share capital alone is £50k and is a complicated process with lots of governance).

If contractors have joined together to form a company they could still be exposed to IR35 whether by definition of their company being a personal services company or if the work being done is as a disguised employee of the end client. This article provides much more detail.

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If a limited company has a secretary would it still be possible to pay their salary via an umbrella?

The only way would be for the contractor to pay the salary from the net income they receive from the umbrella company. The secretary no longer becomes a cost/expense that reduces the taxable income. Moving to inside IR35 means you are effectively subject to taxes and NI at source. There may be some clever accounting solutions to this but it would need an accounts expert to advise.

Speak with an IR35 expert
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