IR35 – What You Need to Know
IR35 is the product of two regulations that were designed to help differentiate between self-employed individuals who are deemed to be employees of their clients and those who run their own businesses.
The Governments aim with IR35 is to prevent tax avoidance, and bring the taxation of contractors more into line those on PAYE. Individuals who are providing their service through a limited company should be paying relatively the same tax and national insurance contribution (NIC) as employees who are directly employed by the company. IR35 came into effect in April 2020.
IR35 can be difficult to wrap your head around as the product of two pieces of legislation. This guide takes you through everything that you need to know about IR35 in practical terms and how it might affect your business.
Is the individual employed or self-employed?
The purpose of IR35 is to differentiate between those who are directly employed by a client and those who are self-employed. This question is what IR35 sets out to define and resolve.
How IR35 works
IR35 came into effect from April 2020 and focuses on medium and large private sector clients. It requires businesses to deem whether a contractor is an employee and directly employed by the organisation or if they are self-employed through their own limited company.
Prior to April 2020 it was the Contractor who made that determination now it is the end client.
The decision now goes to the organisation paying the contractor’s fee – typically either the organisation itself or an agency. If the contractor is deemed to be inside the guidelines of the IR35 regulations, the organisation will need to pay them as a typical employee.
If the contract continues to be paid via their limited company, the fee-payer will be responsible for deducting their NIC to HMRC and paying the relevant income tax. The payments made by the fee-payer are reported through an RTI – Real Time Information – report that goes to HMRC.
Agencies like FD Capital make these returns for both our PAYE and for the payments we make to contractors.
To recap on how IR35 works:
- Large and medium organisations will decide if their contractor is hired as an employee or self-employed.
- The information goes to the person responsible for making payments (the fee-payer), who will then have to notify the contractor.
- The fee-payer (either the organisation or an agency) will pay the contractor either as a Limited Company or an employee, while also making the required tax deductions.
Who is liable for paying taxes?
Before April 2020 and pre-IR35, the contractor was entirely responsible for deciding their employment status and paying their tax.
As a result of IR35, the responsibility to pay tax now lies equally with the client and contractor. It is the responsibility of the client to communicate the employment status of the contract to the fee-payer, who in turn notifies the contractor. If the feepayer continues to pay the individual as a limited company as they are deemed to be an employee under IR35, both parties are liable for any unpaid taxes.
Are there exemptions to IR35?
Not as such, under the terms of the Companies Act, smaller organisations will not be liable for any unpaid taxes and are exempt from the IR35 regulation (If HMRC decides that deductions should have been made). A company is defined as a ‘small’ company if they have an annual net turnover valued at under £10.2 million with less than 50 employees and a balance sheet that is under £5.1 million. If you contract for work with a small client the determination is made by ourselves the agency.
However, if the organisation/end client is a small organisation that is not a Limited Company, the IR35 regulation will continue to apply.
How we can help with IR35 regulations
We know that IR35 regulations can be difficult to understand for medium and large companies. That’s why our team at FD Capital are here to help. Our team of financial specialists are fully engaged with the IR35 regulations and can help and provide advice on the employment status of your contractors. We send all of our clients a determination form, which records your basis of status determination.
What is an umbrella payroll?
When you’re making payments to contractors who fall within the IR35 regulations, then we can either put the contractor on our own payroll or use an umbrella to make the deductions, which are then paid to the contractors personal service company net of deductions.
To recap, these are the steps that FD Capital goes through with our clients when paying contractors under IR35:
- Obtain our clients IR35 determination.
- Ensure that the correct contract is issued to the contractor
- Deduct the correct income tax and NIC in-house
- If the contractor is inside the IR35 regulation, Employers National Insurance is owed and will be deducted from the agreed day rate.
- Pay the net amount to the contract instead of the gross invoice value
- Submit the real time information (RTI) to HMRC
- Or we use one of our Partners umbrella payroll providers to make these deductions for you.
At FD Capital, our team of expert consultants will can assist with the administration and we’ll take care of the payroll work done by our FDs and CFOs no matter what basis they work on either a full-time, part-time or interim basis. We’ll ensure that the payments are made correctly, on time, and in compliance with the IR35 regulations.
FAQs about IR35
Have you still got questions about IR35? Are you not sure how it works in practice? We’ve rounded up the most frequently asked questions about IR35.
What does IR35 mean in practice?
IR35 means that the responsibility for determining the employment status of the contractor falls to the client. The fee-payer, who is typically the organisation, will be responsible for making the correct NIC and income tax deductions to HMRC.
How will IR35 affect the margins of my business?
You may see an impact on your margins as a result of IR35. If you are paying contractors through a Limited Company, you will not be paying employer’s national insurance. As a result of IR35, the margin for a contractor with a Limited Company may be at risk.
A contractor has carried out an IR35 test and is outside IR35
It’s up to the end client to make the decision with regard to IR35. If for any reason the contractor is suspected to be inside IR35 when they claim to be outside of it, they can be investigated by HMRC as a result. If the contractor is found to be outside IR35, the end client may decide to issue another IR35 test, and their contracts will have to be reviewed based on this.
How does it work with umbrella companies?
An umbrella company allows you to outsource your employee payroll. At FD Capital, we provide HMRC compliant payroll services using a partner umbrella provider or via our own payroll.
Have you got a question about IR35 and how it works? Get in touch with us via our contact page.