If you are servicing your clients via an intermediary, such as a limited company, it is likely you have chosen this business structure to take advantage of some of the associated operating and tax benefits.
What is IR35?
‘IR35’ is a set of anti-avoidance tax legislations that seek to change the way in which ‘contractors’ are taxed. In very basic terms, it could deem that an individual contractor is an employee of the client to which it provides services. The resulting risk is the income would be assessed to YOU as the individual, and not your limited company, meaning you pay tax at your personal marginal rate, rather than that of the company (currently 19%).
The legislation has been around since 2000, however HMRC found it difficult to enforce. The legislation is not readily understood, so case law has been relied upon to determine if someone is employed. Here are the three ‘tests of employment’:
- Control: what level of control does the client have over the delivery of the work?
- Substitution: is the work only to be done by one worker, or could you provide a substitute in any circumstance?
- Mutuality of obligation: is the employer obliged to offer work to you, are you obliged to take it?
The new proposed ‘Off Payroll Tax’ measures
Previously the onus was on the intermediary to be compliant. Seeing difficulty with this, HMRC wants to shift responsibility to the employer, meaning they will be required to make national insurance contributions (13.8%) to HMRC. This has already been introduced to the public sector and HMRC plans to introduce it to the private sector in April 2020.
RISKS TO THE CONTRACTOR:
- If HMRC were to audit, tax payable at personal marginal rate;
- Ability for HMRC to investigate prior years;
- Employer may not renew current contract, meaning the contractor loses security in its current employment.
RISKS TO THE EMPLOYER
- Required to pay NI at 13.8% of the amounts paid to the contractors (as if they were employees);
- HMRC may investigate prior years;
- Lose flexibility of using contractors to fulfil certain roles in the company, meaning a review of its total human capital is required
Want to know more? Contact firstname.lastname@example.org