The contracting community is waiting with bated breath for Monday 29th October when the Autumn Budget will be announced and we will find out if the government has chosen to extend IR35 reforms into the private sector.
With so much scrutiny currently surrounding the subject of IR35, now is the perfect time to ensure all operating within the contracting and recruitment community fully understand the jargon that goes hand in hand with the legislation. This is of particular importance to agencies that will ultimately be affected should the reforms be put in place, as many have previously not had any experience with IR35.
Below we take a look through some of the most common terms used when discussing IR35 and their meaning with regards to the legislation.
IR35 key terms
Introduced in 2000, IR35 legislation aims to tackle tax avoidance by identifying whether someone is truly self-employed or should be classed as an employee of a business. Contractors found to be inside IR35 legislation should be taxed as an employee would, whilst those outside of IR35 can continue to contract as normal.
Standing for Personal Service Company, a PSC is a contractor who has established his or her own limited company. When IR35 legislation refers to a contractor, it will always be with regards to a PSC.
Referring to those contractors that are operating as truly self-employed and therefore entitled to the tax benefits of operating their own limited company.
A contractor operating under a limited company but carrying out work in an almost identical manner to that of an employee would be classed as a ‘disguised employee’, this is most often determined by the three tests of employment.
Tests of employment
Typically, this consists of three tests that when used to analyse the reality of a contractor’s work, would determine whether they are a genuine contractor or disguised employee. They include mutuality of obligation, control and substitution.
Mutuality of Obligation (MOO)
Should a hirer be obligated to provide work for the contractor and the contractor is obligated to accept said work, then MOO exists within the contract between the two particular parties, and would likely be deemed within IR35.
This refers to the amount of control an end hirer has over the work a contractor carries out, excessive control would indicate that the contractor is within IR35.
If an end hirer has the right to refuse a substitute from the contractor should they be unable to continue the work stipulated within the contract, IR35 will likely bite.
The government’s Check Employment Status Tool (CEST) has been built to help contractors, end hirers and agencies to determine the status of a contractor with regards to IR35. However, the accuracy of the tool has come into question due to the fact that it does not take MOO into account.
In April 2017 the responsibility for determining the status of public sector contractors moved from the contractors themselves onto the end hirer or agency. It is possible that the upcoming Autumn Budget will announce the extension of these reforms to include the private sector.
Since reforms were introduced a number of businesses and organisations have come under fire for ‘blanket assessing’ contractors (i.e. not assessing their status on an individual contract basis). This has led to a number of tribunals between contractor and business to claim back tax lost due to incorrect status.
Are you struggling to get to grips with IR35 legislation? The expert team here at Exchequer Solutions are dedicated to supporting the clients and contractors that we work with to ensure they are compliant at all times. Call us today to find out how we could help you.