The basics of IR35 should be understood by everyone in the contracting community at a fundamental level, as the rules have such a profound impact on take home pay if you are caught. Here, an expert answers our questions on employment status – does your contract fall inside or outside IR35?
Thanks to Seb Maley from IR35 protection experts, Qdos Contractor, for answering our questions.
Q: What is IR35?
A: IR35 is a piece of tax legislation targeting tax avoidance by contractors operating via a limited company, who should be classed as and, most importantly, taxed like a permanent employee of their end client. Basically, if you are a limited company contractor, working very much like a permanent employee of your client as opposed to having more of a business-to-business relationship, then the Revenue sees it that you should be paying just as many taxes. For more on the basics, read our overview of IR35.
Q: How is IR35 determined?
A: In short: IR35 is determined by using a variety of acknowledged status tests which are based on historic case law, including but not limited to the right to provide a substitute, control, and mutuality of obligations. The tests are applied to your written contract and working practices in order to provide a view of your engagement on the whole as one of employment for tax purposes, or one of a genuine business agreement.
Q: If I am ‘inside IR35’, am I operating illegally?
A: No. It is not illegal to be inside the legislation, you are not going to jail. Being inside IR35 is considered tax avoidance rather than tax evasion, the latter being the illegal one of the two.
The ambiguity of IR35 is of no help here but a professional adviser will be able to answer your questions on the tricky topic of how you determine your employment status.
Q: How do I know if I am inside or outside IR35?
A: Both the written contract and working practices (the day-to-day working relationship with your end client) are reviewed with the IR35 status tests in mind, generating an overall picture of your engagement. Some status tests hold more weight than others and it all gets a bit messy from here so, although we may be biased, it is better to employ the services of professionals to assess your status.
In some instances (currently those engaged to the public sector since April 2017) the end client will be responsible for determining your status, in which case your client or agency will inform you if you are inside or outside IR35.
Q: If I am ‘inside IR35’, what does it mean for me?
A: If you are considered to be operating within the legislation, then you may need to pay a deemed salary (i.e. higher taxes) which is something you would need to discuss with your accountant. You may need to also consider whether the contract is worthwhile undertaking or if you are just starting out, if the limited company route is the best for you, as your take home pay may be considerably less. Calculate out how IR35 will affect your take home pay here.
Q: I fail on one or two of the status tests, does that make me inside IR35?
A: Not necessarily, but maybe. Welcome to our world… Different status tests hold more or less importance than others and that importance may be reliant on different tests, so when we look at a client’s status we look at all the tests as a whole. If you are imagining a definitive checklist of answers to the tests on the wall in our office, you’d be way off the mark, as it is a little more complicated than that. We get a lot of questions which start with how a client may perform on a few of the status tests, followed by “am I inside or outside?”
An employment status specialist couldn’t possibly provide you with an instant answer without looking at everything first.
You can get comprehensive tax investigation (IR35) insurance for as little as £99 per year. A comprehensive option – TLC35 – will even cover the costs of any tax liabilities you may have. Take a look at the options here at Qdos.