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What is IR35?
IR35 Explained: IR35 is legislation regarding off-payroll working rules. HMRC states:
“The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees.”
The legislation changes in 2017 and 2021 have made the client responsible for assessing
if the off-payroll working rules apply. Before, it was the responsibility of the personal service company (PSC, otherwise known as a limited company) to decide if the rules applied.
The decision on whether a contract role is considered “inside” or “outside” IR35, will determine how much responsibility the contractor has in handling the administration and payment of their work (explained in more detail below).
The IR35 legislation changes mean that employers- the assignment's end client- are now responsible for conducting the IR35 assessment and producing the Status Determination Statement (SDS). An assessment tends to focus on the following ‘three pillars’:
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Does the contractor have a genuine right to substitute?
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Is there a ‘mutuality of obligation’ in the contract?
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How much control do you have over the contractor?
The test essentially helps the end client establish the genuine employment status of the assignment. Many clients are using the HMRC Check Employment Status for Tax (CEST) tool; however, a number are also engaging with third parties who provide insurance on any ‘outside’ assessments. It’s important for you to share the SDS with the next company in the chain for the financial risks of IR35 to shift down the chain. You must also have a dispute process for any challenges on the assessment. You have 45 days to respond to a challenge.
One of the main factors that will affect the assessment outcome is whether or not the contractor has a genuine 'Right to Substitute' clause in their B2B contract. Where such a clause exists, and the end Client acknowledges and respects your right to Substitute the work, most assessment tools will produce an 'Outside' status.
It's important to remember that what's included in contractual arrangements matches the reality of the working arrangements! In the case of an HMRC audit, they will look at whether or not what's written down on paper happens, and is respected, in reality.
Another route companies have gone down is to say ‘We no longer engage with the Personal Service Company (PSC).’ This means that companies are not making a blanket assessment on IR35, but are instead implementing a complete change of company policy. Companies are not allowed to make a blanket IR35 assessment.
There is a small company exemption, which means if a company (end client) meets two or more of the following points then the IR35 determination remains with the PSC:
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It has an annual turnover not exceeding £10.2m
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It has a balance sheet total not more than £5.1m
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It had an average of no more than 50 employees for the company’s financial year
If a company should exceed the threshold of two of the above points for two consecutive financial years, then the exemption would no longer apply.
We are now seeing a larger majority of contract roles being determined as ‘inside IR35’.
If a contract is deemed ‘Outside IR35’ then contractors can work on contract assignments through their own PSCs without the need for an umbrella company (you CAN however choose to use an umbrella company, no one is stopping you).
If a contract is “Inside IR35” however, contractors will instead have to go through an umbrella company or go PAYE (usually via a recruitment agency) and receive a net pay each month. It’s Bright Purple company policy to have contractors go through umbrella companies where a role is deemed inside IR35.
We’ve also found that some clients are changing their internal policies on engaging with PSCs. This means that contractors who have been engaging directly with clients using PSCs may need to switch to engaging via an umbrella company or with PAYE (via the recruitment agency).
We know there has been a lot of confusion around IR35 changes, so we continue to work closely with clients and contractors to discuss the impact, and previously held workshops to help our network prepare for the changes.
Our in-house Pre-Engagement Team (PES) are also on hand to guide contractors and clients to help them run through the process smoothly.