IR35 Hub

In order to make sense of IR35, it’s important to understand how contractors (or temporary workers) supply their services (i.e. mechanical fitting, vehicle building, electrical testing etc) via a recruitment agency to a client (hirer). Typically, this is by one of the following engagement models:​

• via a Personal Service Company (PSC), also commonly referred to as a contractor’s own ‘Limited Company’ whereby an individual registers at Companies House and are a director, shareholder and control the company and therefore carrying on a business undertaking, typically engaging the services of an accountant to administer their tax affairs.​
• via an Umbrella Service Provider (Umbrella), an Umbrella, operating PAYE, employ temporary workers who provide their services on temporary contract assignments through a recruitment agency. By definition an Employer/Employee relationship exists between the two parties as they are engaged on a contract of employment with tax and National Insurance deducted from payroll.​
• via Agency PAYE (where offered), the temporary worker is paid through the recruitment businesses payroll, engaged on a ‘contract of employment’ or ‘worker’ contract with tax and National Insurance deducted at source.

IR35 only applies where the worker provides services through an intermediary, usually the workers own personal service company in which they have a material interest (generally beneficial owner or 5% or more interest).

The official legislation is contained within the “Income Tax (Earnings & Pensions) Act 2003 (ITEPA), Chapter 10, Part 2”, but is often referred to as “Off Payroll Working Rules”, “Intermediaries Legislation” or more commonly as “IR35”.​ The legislation has been designed to make sure that an individual who works like an employee, but through their own personal service company (PSC), pays broadly the same Income Tax and National Insurance contributions as other employees.​ IR35 applies where the worker provides services through an intermediary in which they have a material interest, usually the worker’s own limited company, often known as a personal service company (PSC). 

​Under the current private sector legislation the personal service company (PSC) is responsible for their own tax and the IR35 assessment. The PSC contractor decides their status generally using an accountant or third-party supplier to assess the arrangement regarding the services they provide to the hirer.​ In basic terms the PSC contractor will no longer be the decision maker for tax and IR35 assessment, but instead it will be the hiring organisation i.e. the party that is the recipient of the contractors’ services, who will be responsible for deciding if the rules apply from 6th April 2021.​ Following implementation of the new legislation if the contractor is deemed by the Hirer to be inside IR35 the fee payer, usually the agency, will be required to deduct the relevant tax and national insurance that would apply if they were a direct employee. The contractor will receive their earnings net of these deductions.

Where the hirer of the contractors services is classed as a small company or has no UK connections, the responsibility for assessing the status of the arrangement will remain with the contractors intermediary (PSC).​

A small business is defined by the Companies Act 2006 as a company that meets 2 or more of the following conditions:

Total annual revenue of not more than £10.2m

Gross Assets of £5.1m or less

50 employees or less

Clemtech will advise contractors where the small companies exemption applies to the hirer of their services or the hirer has no UK connections.

In order to make a determination an assessment of both the contractual terms and the actual working conditions is required.​ It is not the contractor rather the role that is being assessed. One contractor may therefore have three contracts in a year, two of which are inside IR35 and one of which is outside.​ The hirer must take “reasonable care” when assessing a contractors IR35 Status.​

It is generally accepted that the main areas of consideration from case law should include:​

• Personal Service/substitution: Has the organisation hired the contractor personally? Does the contractor have the right to send a substitute in their place and does this happen in practice? If so this suggests that personal service does not apply and points to an outside determination.​
• Control: If the hiring company exerts significant control over what work is carried out and when, where and how it is done, it is an indication that points towards an employment relationship and therefore an inside determination. ​
• Mutuality of obligation (MOO): In an employment situation this typically means that a worker is offering their labour in exchange for payment and a minimum number of guaranteed hours from the hirer. The worker will be paid for making themselves available irrespective of if work is given to them to complete although they are obliged to complete any work offered. Self employed workers are not bound by the same obligations and only get paid for the work done.
• Financial risk – If the PSC is exposed to significant financial risk in order to perform their duties this would point towards an outside IR35 arrangement e.g. undertaking work for a fixed price rather than an hourly rate. There may also be risks associated with performing the services e.g. whether the contractor is obliged to rectify errors in their own time and at their own cost. Another example being the provision of major equipment, as financial risk arises from acquiring, maintaining and replacing equipment. This does not include small tools such as those certain trades would provide for themselves.​
• Part and Parcel – has the contractor become so integrated into the hirer  organisation that they are indistinguishable from an employee or do they present as an independent contractor?​

This is not a one-off exercise, the substance of an engagement may change over time due to contractual or practical considerations. Determinations should be reviewed at least every 6-12 months as a matter of good practice. 

​Upon assessing a contractors IR35 status prior to commencement of a contact, the hiring organisation is required to provide the contractor with a Status Determination Statement (SDS).​

​An SDS must:​

• Declare the contractors deemed employment status​
• Detail the reasons for reaching this conclusion​​

The SDS must be passed to the worker or organisation the hirer contracts with i.e the recruitment agency.​ In a typical recruitment supply chain, the agency will then be required to pass on the determination to the next party, the workers PSC intermediary. Failure to pass on the determination will result in the tax and NIC liabilities resting with that party.​

The hirer of the services will also be required to set up a status disagreement process and respond to appeals made by the contractor or the agency within 45 days of receipt. ​

PAYE Engagement Only

Due to the tax liability provisions included in the reforms to the off-payroll working rules, many clients may choose to only engage contractors on a PAYE contract basis from 6 April 2021 rather than continuing with services provided through the contractors own personal service company. Consequently, the alternative contractual engagement models will be the provision of services through an umbrella company operating PAYE or agency in-house PAYE, illustrated below:

*it would still be possible to engage a PSC through an agency subject to PAYE deductions but this is unlikely to be an attractive option in most circumstances

Preliminary Assessment or Formal Status Determination Statement – Outside IR35

The HMRC website contains useful information for contractors. The link below may help you to identify how the rules may affect you.

Here

Communication: Clemtech will ensure that all contractors are kept informed once the client has confirmed their stance and will liaise with all stakeholders to ensure that the relevant course of action is taken.

Inside IR35: Clemtech will provide compliant PAYE solutions including an approved list of accredited Umbrella Companies along with an in house PAYE payroll solution. Preferred list of Umbrella Companies

Outside IR35: Clemtech will continue to facilitate the payment of contractors via their Personal Service Companies.