IR35 or Intermediaries Legislation was introduced to tackle the problem of tax abuse by individuals or companies. It particularly intends to stop tax abuse by individuals who own a Personal Service Company that acts as an intermediary and saves them from being treated as an employee for the company of their clients. This way, they end up saving a considerable amount of tax as well as NI savings.
Therefore, when an enquiry is made as a part of the IR35, and an individual or service provider is caught, they are asked to calculate all their received payment as a part of their salary. Then, they are asked to show their national insurance contributions as well as taxes on payments that they paid as dividends. Moreover, there is also a new rule with regards to the subsistence and travel that was introduced from April 6, 2016. This rule states that if HMRC puts a particular contractor into the IR35 after an enquiry, they will not be allowed to claim for subsistence and travel expenses.
Let us check out some more specific things that you need to know about IR35!
What defines the IR35 status?
It is essential to understand who comes under the IR35 status and what are the factors that ensure that one is inside or outside this status. These things include:
- The autonomy of a contractor in their work with their client.
- Possibilities of sending a replacement when a contractor is not available.
- The mutual obligation of the client and the contractor to extend or not extend a contract after they end a contract.
- Other factors such as an overall financial risk, provision of equipment and the business in the account of the contractor.
Hence, these factors play an essential role in deciding if an entity is included in the IR35 status. So, if you are a part of the supply chain, having ideas of these factors is very important. It is basically everything that you need to know about IR35 so that you can make your decisions accordingly. In addition to that, it is crucial to understand that there is no way you can generalise the factors when it comes to defining the status of an IR35 contract. Therefore, if you only assess the status of a contractor based on their role and not on their individual status or situation, it might lead to some problems.
Who needs to ensure that IR35 is appropriately applied?
Since April 2020, there has been a significant change in the application of the IR35. In the past, it was the duty of the contractor to define the IR35 status of a contract. However, now, the client has to ensure that. So, the fee payer has to also make sure that all the correct tax liabilities are paid. Often, the recruitment agency is the fee payer, so they need to be on top of their game with this.
Who is affected by the IR35?
It is also important that you know about the type of organisations as well as the type of recruiters that are affected by IR35. At present, all the public sector entities and businesses have a direct impact of IR35 on them. They need to do their contract assessments based on IR35 followed by the reforms that were made in April 2017. On the other hand, large-size, as well as medium-sized organisations that work in the private sector, will have a direct impact of IR35 from April 2020. When seen from the perspective of the recruiters, they need to place the contractors into specific roles who are included by IR35. Here is good read on How will I know if I am caught by IR35 and what will it cost me?
What ´Reasonable Care´ needs to be taken by the recruiters?
The recruiters need to adhere to this because the HMRC stated that while making a contract, ´reasonable care´ must be taken and IR35 must be defined well. If the clients do not take ´reasonable care´ in making the contract, they will be liable for the mistakes. Therefore, everyone involved in a supply chain must work together to ensure that everything is done as per IR35.
When working with the public sector, some of the businesses took a blanket decision of purring all the off-payroll individuals as a part of IR35. But this can be very risky and might have an adverse impact because this reduces the overall take-home payment of the worker. As a result, they might either look for other options or ask for higher rates. Therefore, it is crucial to do an individual assessment and make the right decision.
To sum up, these are some of the crucial things that you must know about IR35 so that you don´t end up making any mistakes. For more details, you can always get in touch with us and learn about the tips and tricks around it!