IR35 is designed to help identify the difference between a legitimate business and that of a disguised employee. This tax legislation is aimed at personal service companies operating much like an employee of their client instead of delivering a B2B service that is genuine and, therefore, claims back the additional PAYE tax and NICs that they would have been required to pay if they were an employee.
So, inside and outside IR35 are two terms that relate to your status, but what do they mean?
Essentially, they help determine whether you are a legitimate contractor that relates to outside or are an employee for tax reasons, which is known as inside. Both terms relate to whether you are working within the scope of the legislation or not.
If you are considered to be inside IR35, then for tax reasons, you are seen as an employee of your client, which means that you are liable to PAYE.
Through being inside IR35, you have to make sure that you are paying the right taxes. That means that a deemed payment of income tax is made once the tax year comes to an end. You will also need to reconsider your status should your working practices change or you start working on a new contract.
Suppose you are linked with the public sector or medium or large private sector business. In that case, your tax and NICs will need to be deducted by the fee payer, which is usually a recruitment agency. Although many are not designed to manage contractors via payroll. So, they will only work with you through an umbrella company. This will act as an employer, a service that does cost.
If you are considered to be inside IR35 after an IR35 enquiry has taken place, HRC will then raise a determination for the income tax, NICs, and interest, along with any penalty that should have been paid during the period. This can amount to significant costs.
If you are operating as a legitimate business, then this means that you are outside IR35 and do not have to adhere to IR35 rules. Therefore, you can give yourself a salary, take what is remaining as dividends, and take responsibility for paying taxes.
If you are linked with the public sector or a medium to large private sector business, the end client will be responsible for identifying your status. If they consider you outside IR35, your fee will be paid, but you will be responsible for paying your taxes. Even if you are identified as being outside of IR35 legislation, it’s still possible for HMRC to carry out an inquiry. An enquiry can take many years, leading to contractors and end clients, causing themselves problems due to a lack of experience in dealing with HMRC inspectors. In clear cases, it has resulted in HMRC considering the contractor to be inside IR35.
For contractors working in the public sector and the private sector from April 2021, the end client has to take responsibility for recognising your status. They will use the CEST tool from HMRC to choose to use an independent service that can include the Qdos Status Review.
Many end clients choose to give blanket determinations where they place all contractors inside IR35 to overcome the administrative burden and any liability concerning the rules, but this is not in line with the legislation. Some will determine this based on the contractor’s role despite HMRC, considering this to be inappropriate. However, there are many issues when it comes to ensuring compliance with the legislation.
For contractors in the private sector, the responsibility is on you to determine your status. Therefore, you should have your written contract reviewed to ensure it is IR35 compliant while assessing all working practices.
How you deliver services is vital, and HMRC will consider the contractual terms while also checking these with the end client when carrying out an inspection. As a result, if your contract does not clearly relate to what is considered real, any positive aspects of the agreement would have very little influence on an IR35 enquiry. What this means is that when determining your status, you should always review your working practices.
Even though there have been changes made to how IR35 is administered, the tests used to identify status remain unchanged. If you have questions regarding being inside and outside IR35 contact Umbrella Options today.