IR35: Frequently Asked Questions
As a communications, digital, and marketing recruitment agency operating within the contractor market, we engage daily with both contractors and clients regarding IR35. Our goal is to facilitate a smooth transition for all parties by sharing our knowledge on the upcoming changes and assisting everyone in navigating potential challenges.
Understanding IR35
IR35, also known as off-payroll working, is legislation introduced in April 2000. Its purpose is to ensure that contractors operating similarly to permanent employees are taxed appropriately, along with the clients “employing” them. Historically, contractors assessed their own IR35 status. However, since April 2017, public sector clients have been responsible for this determination. The same change was announced for the private sector, effective from 6th April 2020, but was postponed to 6th April 2021 due to COVID-19.
Who is Affected by IR35?
All contractors operating through a UK limited company must have an IR35 assessment for each role they undertake. If deemed outside IR35, they can continue as before. If inside, tax is deducted at source by the fee-payer. Contractors inside IR35 can operate through their Personal Service Company (PSC) as a “deemed employee,” through an umbrella company, or as a PAYE worker. Each option significantly impacts take-home pay, reducing net income by approximately 25%.
Completing an IR35 Assessment
While clients must assess workers providing services through a limited company, contractors should also conduct their own due diligence. Free online tools, such as HMRC’s Check Employment Status for Tax (CEST), are available for assessments. Although CEST has mixed feedback, HMRC supports its results if completed accurately. Paid assessments from third-party companies offer detailed insights and often include insurance against incorrect determinations.
Disagreeing with Client Determinations
The government has introduced a “client-led status disagreement process” for contractors and recruitment agencies. Clients must respond to disputes within 45 days, either confirming their assessment or providing a new determination. The original determination stands during the dispute process.
HMRC Investigations
HMRC will not retrospectively review engagements before April 2021 unless fraudulent or criminal activity is suspected. Contractors should ensure compliance moving forward. If using an umbrella company, select a fully compliant one, such as those accredited by FCSA, to avoid triggering investigations.
Choosing Between Limited Company and Umbrella Company
Contractors inside IR35 have three options: operate through a limited company as a “deemed employee,” work through an umbrella company, or be paid as a PAYE worker. Each choice has pros and cons. Operating through a limited company means payroll deductions without employee rights. Umbrella companies offer employment rights and a continuous employment record. PAYE workers receive worker rights through their recruitment agency.
For contracts outside IR35, working through a limited company is beneficial as it improves take-home pay. Contractors should evaluate each option based on their circumstances and the IR35 status of each role. Recruitment agencies can provide guidance on these decisions.
