What is IR35?
IR35 was introduced by HMRC (then Inland Revenue) in 2000, as a way to tackle false self-employment within the contracting industry. The legislation aims to identify contractors that are genuine, and those that are disguised as contractors, when in actual fact they should be classed as an employee. This ultimately means that the relevant tax and NI should be made payable to HMRC.
Reforms to IR35 were introduced in April 2017 for contractors working within the public sector. These changes meant that it is no longer the responsibility of the contractor to determine their own IR35 status, but that of the client engaging with said contractor. If deemed to be within IR35, the client (the company paying the contractor) must deduct the required tax and national insurance contributions via PAYE.
Similar reforms came into force in April 2021 in the private sector for medium to large businesses, these businesses are required to determine the IR35 status of a contractor and make any necessary deductions if deemed to be within IR35.
Contractors engaged with small businesses will still be responsible for identifying their own status. HMRC defines small companies based on three main criteria, as set out be the Companies Act 2006.
- Annual turnover not exceeding £10.2 million
- Assets outlined on the balance sheet must not total more than £5.1 million
- No more than 50 people employed by the company
What does IR35 mean for recruitment agencies?
For recruitment agencies engaged with contractors, an extensive understanding of IR35 legislation is essential to ensure both you and the contractors you work with are compliant.
Unless contracting directly with a client, the responsibility of administering a contractor’s IR35 status will fall on the shoulders of the agency, with the appropriate deductions made at the source prior to the contractor being paid. If a recruitment agency fails to make the necessary tax and NI deductions and HMRC identifies these failings, they themselves will be liable for any shortfalls.
The tests of employment
For recruiters still unsure of how to identify IR35 status there are five main tests of employment that should guide you to the appropriate decision, these are:
Mutuality of obligation (MOO)
An employer is legally obligated to provide work for an employee, and the employee is obligated to accept this work. For genuine contracts between a business and contractor, the business is not obligated to provide further work beyond the restrictions of the contract.
This refers to the amount of control a client has over the work a contractor carries out, predominantly focusing on how they will carry out the work.
A contractor outside of IR35 should be able to send a substitute should they be unable to continue with or complete the work at hand.
To be truly self-employed means a financial risk for a PSC contractor. If a contractor is provided with insurance, equipment and training to fulfil a contract, and the contractor is paid no matter the outcome, then they would be deemed within IR35.
There should be very clear distinctions between employees of an end client and contractors carrying out work for an end client. Some examples of this could be if a contractor was involved in regular staff meetings, received discounts or perks, as an employee would. This would subsequently indicate that the contractor was a ‘disguised employee’ and therefore inside IR35.
How is Exchequer Solutions supporting agencies with IR35?
The Exchequer team has spent countless hours guiding and supporting our agency partners through IR35, how it impacts their business and the procedures they should have in place to ensure compliance at all times.
Still confused about IR35? Our team are on hand to answer any questions you may have. Get in touch today to find out more.