Understanding IR35 and its implications



Over the last couple of months, we have had a number of examples of confusion around IR35 and the best approach to take when deciding whether contractors should sit inside or out. So, we thought it was worth giving an overview and our thoughts. Let’s start with the basics.
 
What does inside IR35 mean?
HMRC introduced the off-payroll working rules to make sure that contractors would be classed as employees if there was no intermediary pay broadly the same tax as employees. This means that of a contract is inside IR35, that contractors have to pay income tax and National Insurance Contributions just like employees do.
 
And what does outside IR35 mean?
If a contract is outside IR35 it means that HMRC sees contractors as “genuinely” self-employed and they’re able to pay themselves in a tax-efficient way. The contract is likely to include details of the services a contractor will be providing, as well as when and where they’ll be working. But, crucially, it won’t include demands from an employer on performance monitoring and appraisals.
 
How do you work out if a contractor is in or out?
The best way is to use HMRC’s Check Employment Status for Tax (CEST) tool. To use the tool, HMRC says you need the following:
 
·       Details of the contract
·       The worker’s responsibilities
·       Who decides what work needs doing
·       Who decides when, where and how the work is done
·       How the worker will be paid
·       If the engagement includes any corporate benefits or reimbursement for employees.
 
You can check the tool out here.
 
Our advice
The issue we have been seeing more and more of is employers are searching for contractors before deciding whether or not the prospective work falls inside or outside IR35. And we don’t think that’s the right way round. Our advice is that when you have the need for a contractor that you use the CEST tool first and make the in or out decision before you go out to find someone. It makes the process easier and both parties understand the potential role up front.
 
Does CEST give accurate results?
Many of our clients have asked us whether we think CEST gives accurate results.  For its part, HMRC says CEST is accurate and it “will stand by the results, provided the information input is accurate and it is used in accordance with our guidance.”
 
HMRC can open an investigation into an IR35 status if it thinks an outside IR35 determination is wrong, so it’s important to keep accurate financial records.
 
We encourage our candidates to have IR35 compliance in mind and actively discuss you’re their status with our clients.
 
Put simply, the off-payroll working rules are complex. If you’re unsure about whether a contract falls inside IR35 or outside IR35, get professional advice.
 

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