Marketing Director
IR35 is a tax legislation designed to combat income tax and national insurance contribution avoidance from those workers supplying contract, freelance or interim support for businesses. The rules are aimed at those workers who provide interim services via an intermediary, including those who operate their services through a limited company. There is much ambiguity around the IR35 rules but the principle behind the legislation is simple; if a worker would be an employee of the business if an intermediary was not used, this worker is a ‘deemed employee’ and therefore inside IR35 rules. Being classified as inside IR35 rules means this worker should pay the same income tax and national insurance contributions as a PAYE employee.
What is IR35? What is the impact?
The impact of IR35 on both employers and contractors is significant. In updated IR35 rules, many employers now are responsible for the IR35 classification of its workers on a contract by contract basis, increasing the administration time and resource required within HR and Talent teams significantly. The employer may also be liable for unpaid income tax and national insurance contributions if the IR35 classification is deemed incorrect by HMRC, provided all parties followed the right procedure with the correct information.
The financial impact of IR35 is significant for those providing contract, interim or freelance support, common within fields such as product management, marketing, eCommerce, IT, media and tech. When these rules were introduced in the Inland Revenues 35th press release, it was hoped by interim workers to never go ahead – these rules reduced a contractors net income by up to 20% overnight, deducting a couple of thousand pounds more tax and national insurance from the gross pay of workers within limited companies.
As a reputable interim recruitment agency across marketing, product management and eCommerce, we often get asked ‘what is IR35?’ including questions about the latest IR35 rules, legislation and how that affects both interims and their employers.
What is IR35? Find more resources
To answer that question ‘What is IR35?’ you may also want to view our in-depth blogs
– IR35 assessment rules for contract workers
– IR35: what does the legislation mean?
Here as some of the most common IR35 questions and their answers.
IR35 frequently asked questions
Discover answers to the top IR35 questions, answered by our co-founder and IR35 expert, Chris Mason. Watch the videos or read the text to find the answers to each question.
Where does IR35 apply?
The IR35 regulations have been around for many years, but there were some significant changes in April 2021. Those changes made hirers or private sector organisations responsible for determining IR35 status and determining whether the off-payroll rules apply.
HMRC have produced an online tool; the CEST tool. Input honest answers into this CEST tool and HMRC have confirmed they will stand by the resulting determination. So, understanding whether IR35 applies to the engagement is relatively straightforward.
Compliance is relatively easy as well, because if off payroll rules do not apply, if IR35 doesn’t apply the contractor is able to work through their limited company and they’re responsible for paying the correct tax.
If off payroll rules do apply, the fee payer is responsible for ensuring that the contractor or the temporary worker pays the correct tax.
If you’re an organisation that engages contractors directly, you’re both the hirer and the fee payer.
If you work with an agency partner, you will be the hirer and the agency will be the fee payer.
In that type of engagement, the agency will either engage the contractor on a fixed term contract and supply them, or they will only engage them through a compliant umbrella model where they deduct tax and national insurance at source.
So, compliance is relatively easy. It’s mostly a commercial problem because if IR35 rules off payroll rules do apply contractors tend to quote slightly higher rates because their tax liability is greater.
Will IR35 affect me?
If you’re a temporary worker or a contractor and you’re wondering if the IR35 rules will affect you, or the off-payroll rules, the answer is yes.
Before April 2021, if you’re working for a private sector organisation, you as the contractor would be completely responsible for deciding whether off-payroll rules applied and making sure that you paid the correct amount of tax. That decision has now been taken out of your hands. Now, the hirer, the organisation that is engaging you are now responsible for making that determination.
If the off-payroll rules do not apply, then usually you’re able to operate through your limited company and again, you’ll be responsible for making sure that you’re paying the correct amount of tax. If the off-payroll rules do apply, it’s almost certain that you won’t be able to operate through your limited company. Usually, you’ll be asked to engage via a compliant umbrella company.
Sometimes there might be a recruitment agency that would engage you on a fixed term contract. The agency will make sure that your tax and national insurance is deducted at source. They’ll do lots of calculations to make sure that you’re paid the correct amount of holiday pay and statutory pension payments etc.
How does IR35 affect you? The net effect is that usually you’re probably 15 to 20 percent worse off in terms of your net income. Engaging through a limited company is often complex so this is just a rough guide and an accountant would be able to confirm this for you.
In most instances, if engagement falls within IR35, the off-payroll rules apply, contractors tend to ask for a slightly higher rate just to compensate for loss of income through the additional tax liability.
How to determine IR35 status
If you’re hiring organisation and you’re engaging a temporary worker and you’re wondering how you make that IR35 status determination, it’s really straightforward. So, we normally recommend that our clients use HMRC’s online tool, the CEST tool.
The CEST tool takes about five minutes to complete and HMRC say that if you answer the questions honestly and genuinely, they’ll stand by the results. It doesn’t record the things that you put in, but if you want to at the end, you can download it with your determination and also the answers that you’ve put in and the justification for the status determination as well.
There’s been some criticism of it because obviously it’s produced by HMRC, so it may sway towards placing engagement within IR35 because that’s how HMRC generates more tax revenue.
One of the things that we’ve noticed is that the tool and the logic behind it was designed pre pandemic, and since then there’s been a big shift to home working. One of the questions relates to the location of the work. So will the engagement or the temporary worker work at your premises, within your office space?
I think that if you’re genuinely able to make them remote based, then that can help to place the engagement outside of IR35. But once again, it’s important that you answer the questions genuinely and that the answers you give HMRC really reflect the reality of the engagement.
Can IR35 be backdated?
We sometimes talk to clients who have engaged a contractor in the past and haven’t even thought about IR35.
That’s a really bad situation to be in. The whole purpose for the changes that came into effect in April 2021 was to make the hirer responsible for determining the IR35 or the off-payroll status of the engagement. If an engagement is within IR35 and the correct tax is not paid by the contractor, probably because they’re working through a limited company and as the employer you have no visibility over how they pay themselves, HMRC can uncover this and come after the fee payer. That’s the big change.
In terms of the chain of engagement, the hirer is the organisation which engages a temporary worker. The fee payer is the organisation that pays them, so if you’re engaging contractors directly as an organisation, you’re both the hirer and the fee payer. If you’re engaging via an agency, you’ll be the hirer and the agency will be the fee payer, so you have that kind of layer of protection as an employer.
As a consequence, agencies are really clued up on this and they will not engage contractors via a limited company for engagements that fall within IR35, as there is no visibility over how they pay the tax.
The simple answer to ‘can IR35 be backdated?’ is no. It’s really important – you could be liable. So, it’s really important that you make your status determination before the engagement commences and then engage the contractor in the right way from the very beginning.
IR35 - who is the fee payer?
Important IR35 changes came into effect in April 2021 which affected mostly private sector organisations, and along with that came some new IR35 definitions.
A hirer is the organisation that is actually engages the temporary worker, and for who the temporary worker does the work for.
There is also a new definition called a fee payer. Now the fee payer is the organisation that makes a payment to the contractor or the temporary worker.
So, if you’re an organisation that engages temporary workers directly, you’re both the hirer and the fee payer. But if you work with an agency partner, you will be the hirer and the agency will be the fee payer.
The IR35 responsibility and liability is different, depending on which set up you have for engaging the contractor. The hirer is responsible for determining the IR35 status – there’s no getting away from that and hirers must do it.
The fee payer is responsible for ensuring that the correct amount of tax is paid if the engagement falls within IR35. So that fee payer liability sits with you if you engage contractors directly.
However, it will sit with an agency if you’re working through an agency partner.
IR35 - who is the end client payer?
The end client payer isn’t really a definition that’s used with IR35. The correct term is fee payer.
The fee payer is the organisation that will make a payment to a temporary worker. So, if a private sector organisation is engaging a temporary worker directly, they will be both the hirer and the fee payer.
If there is an agency involved that’s supplying to the end client, the end client will be the hirer and the agency, the organisation that makes the payment, will be the fee payer.
IR35 - who pays the tax and national insurance contributions?
We often get asked about tax and national insurance calculations and who’s responsible for making those payments.
So, if we look at an engagement, that is outside of IR35 first, where a contractor is operating through their own limited company. In that type of engagement, the contractor who’s the director of the limited company is responsible for all their tax and national insurance calculations and making sure they’re doing everything correctly and they’re fully compliant.
Usually you’ll have an accountant, that helps you with that as most contractors are not accountants, they’re experts in other areas, and you’ll engage an accountant to make sure you’re paying the correct amount of tax.
Where an engagement falls within IR35, the fee payer is responsible for making sure that the correct amount of tax and national insurance is paid and is liable if that doesn’t happen. Now for that reason, you won’t be able to operate through your own limited company because there is no visibility or control over how you pay yourself. You might be paying yourself in dividends for example.
In that type of engagement, you’ll be you’ll only be able to engage if you operate through a compliant umbrella model who will deduct your tax and national insurance at source.
Sometimes the agency will engage you on a fixed term contract, and again they will do all the tax and national insurance calculations to make sure that everything is correct.
So, if an engagement falls within IR35 you’ll be an employee of a company, and you just receive your net pay and a payslip. So that’s really clean and simple.
Outside of IR35, if you’re operating through a limited company, it’s your responsibility.
Will IR35 be scrapped?
So, we’re sometimes asked, ‘Will IR35 be scrapped?’ and at the moment, there’s no indications that this will happen at all.
If you think about it, IR35 is legislation that’s designed to make contractors or interim workers’ pay what HMRC believes to be a fair amount of tax.
This legislation is a tax collection mechanism and if you think about the economic climate, I think it’s very unlikely that the government will change IR35 in any way.
Why is IR35 unfair?
There are two sides to this argument, as there are with many arguments. The reason HMRC targeted contract workers is because they often saw contractors that work five days a week, often for years on end, within the same organisation alongside permanent employees. HMRC’s view was that these are classified as disguised employees that are just paying less tax, compared to their permanent colleagues.
This type of disguised employee situation was evident across many different sectors; IT, product management, marketing, finance, and a lot in the media industry as well.
The flip side is that there are lots of genuine contractors that are real experts in their field that are also being affected by this new legislation. These genuine contractors tend to do short engagements or project work, taking on financial risk because sometimes they’re out of work and in between projects, and this IR35 legislation does and can apply to those contractors as well.
So, it is a challenging one around the fairness of IR35, and why we see lots of questions being asked by the interim community around the fairness of IR35.
As always, the question is where do you draw the line? That is the very question that HMRC are trying to answer with this legislation, although many find the rules ambiguous and hard to implement.
IR35 vs PAYE calculator
We’re often asked whether there is much difference to net pay between different types of engagements and contractor business set ups, i.e., whether a contractor is working through a limited company or working on a PAYE basis.
Most umbrella providers, and these are specialist accountancy organisations that cater for the contract market, have tools and calculators on their website. These organisations will also engage and employ interim workers on fixed term contracts and provide accountancy services for limited company contractors as well.
So, if you Google ‘Umbrella PAYE calculator‘, you’ll find a range of umbrella companies available. Their calculators allow you to put in a day rate, and it will break everything down around the deductions and what your net pay will be.
So, there will be a difference to your net pay, depending on company set up and IR35 status but these umbrella calculators allow you to easily compare between the two. If you search for umbrella company providers, you can usually talk to them and they will model those two situations for you so you know where you stand as a contractor and can forecast your pay moving forward.
What is the IR35 small company exemption?
We are often asked by clients about the IR35 small business exemption and whether it applies to them. The background to this is that when HMRC went through consultation around this legislation, they received feedback from the industry that many small organisations that they’re trying to grow, they need expertise, they can’t afford to employ people permanently or they only need people for short spaces of time.
HMRC took that onboard and decided that they didn’t want to kill that piece of flexibility in the labour market, so they created a small business exemption.
So, if the small business meets two of these three criteria, they don’t have to worry about
IR35. And the three criteria are:
1. turnover not exceeding 10.2 million
2. a balance sheet total of not more than 5.1 million
3. an average of no more than 50 employees in the financial year.
There is a further interesting point, which is that some organisations will scale through these thresholds in a financial year. What do you do in this scenario? We have investigated this, and we spoke to HMRC to clarify.
So, if you engage a contractor and you meet two of these three criteria, IR35 doesn’t apply. But at some point, during that financial year, you failed to meet these test criteria, you have to go through two financial years of not meeting the small business exemption criteria before IR35 applies. So, small businesses do have some breathing space to get the IR35 rules correct.
IR35 small business exemption rules are a little bit complex, so do reach out and talk to us if you you’ve got further questions about this topic, and you want to discuss that in more detail.
IR35 2024 changes
In the current system, contractoruk.com explains that ‘double taxation’ occurs when HMRC deems that a contractor has been incorrectly placed outside IR35 by an end-user business.
In these instances, HMRC doesn’t offset the tax already paid by a contractor when issuing a business with a tax bill for non-compliance. The tax office collects more than it’s actually owed — hence the phrase, ‘double taxation’.
From 6th April 2024, the Government are releasing a legislative fix to this problem. HMRC will now use a combination of “assumptions and best judgement” to reach an estimated value of taxes already paid by the contractor, including “relevant tax return data”. Deductions will include:
- Corporation tax, paid by the contractor’s intermediary
- Income tax and Employee NICs paid to the contractor via their intermediary
- Class 2 and Class 4 NICs
- Tax on dividend payments
Further IR35 reading
Summary
We know IR35 is complex and ambiguous for both contractor and employer – that’s why we are here to help. If you are looking for advice, and looking for your next interim role within marketing, product or eCommerce, get in touch with us today.
If you are a hirer looking to employ an interim worker, contact us today and we can help you navigate the IR35 rules and find you the right candidate for your business needs.
