Understanding Contracting. IR35.

Working within the contracting market is very different from working on a traditional permanent PAYE arrangement. Individuals looking to make the switch can be presented with new phrases and processes to familiarise themselves with, one of which is IR35.

IR35 is a complex topic, however, my colleague David Soutter and I have broken it down into digestible chunks below:

"The off-payroll working rules make sure that a worker (sometimes known as a contractor) pays broadly the same Income Tax and National Insurance as an employee would”. Gov.uk

The aim of the IR35/off-payroll working legislation is to crack down on tax avoidance by ensuring that there is continuity in the tax system. It closes down a loophole in the tax system whereby workers could pay less tax by supplying their services to clients through an intermediary, like a limited company.

This is a high-level overview.

1)?????Who does IR35 apply to?

• Contractors.
• Any business hiring a contractor.
• Recruitment agencies offering contracting solutions.

2)?????Status Determination

• The end user (i.e. the client) is responsible for making the status determination for the role – deciding whether the role is deemed Inside IR35 or Outside IR35.
• There are multiple factors taken into consideration when making this determination. Businesses must show that reasonable care was taken during the determination and are advised to utilise the CEST tool (Check Employment Status Tool) on the gov website.
• Note: if HMRC believe a role should have been Inside IR35 but was treated as Outside IR35, they have the power to pursue unpaid taxes from the last 6 years and issue hefty penalties.

3)?????Inside IR35

• If a role is deemed to be Inside IR35, the worker is seen to be an employee for tax purposes and is required to be taxed at source. The “fee payer” (i.e. the entity that pays the contractor) will be obliged to deduct and account for tax and NIC.
• Contractors will therefore need to run via a relevant PAYE system or an FCSA accredited umbrella company.

4)?????Outside IR35

• ?If a role is deemed to be Outside IR35, the contractor does not need to be taxed at source and can therefore supply their services via a limited company.
• The contractor is then responsible for submitting their tax returns accordingly.

5)?????Umbrella Companies

• FCSA accredited umbrella companies are secure way of payrolling a contractor in line with the IR35 requirements.
• The umbrella company will employ the contractor and will pay them in line with the IR35 requirements and ensure they are taxed at source.
• The umbrella company will also calculate and administer any necessary holiday pay entitlement and pension contributions.

Jennifer is a Director at Jameson Legal and Head of Jameson Contract Solutions (JCS).

Jennifer specialises in placing lawyers on an interim, contract and ad-hoc consultancy basis.

[email protected]