06 Sep Contractors 101 — How to Know Your IR35 Tax Status?
The UK government had introduced the IR35 tax legislation in 2000. The purpose of introducing the tax legislation was to determine the self-employment status of independent contractors. It was introduced to catch individuals who were gaming the tax system to avoid taxes.
A contractor who is deemed to fall within IR35 has to pay taxes and contribute to national insurance (NI) similar to regular employees.
A lot of contractors as well as companies that support self-employed individuals have criticized IR35 tax reform due to the inherent confusion. There have been negotiations about simplifying the process of determining the employment status for tax purposes, but no concrete step has been taken in this regard.
Previously contractors were required to inform about the IR35 status. However, after the introduction of the IR35 reform in April last year, the responsibility has shifted to public sector companies. Talks are underway to extend the tax reform to private sector companies within the next few years.
You should talk to one of the professional contractor accountants to navigate through the complex IR35 tax rules. Here we have listed some factors that can help you determine whether your contract falls within the IR35.
1. Business Location
One crucial factor that determines the employment status is the business location. You or the intermediary through which you have contracted with the public or private sector company must own or rent a business premise that is separate from the premises of the end client. Also, the premises should be different from your own home. In case this is not the case, the employment will deem to fall within the IR35.
2. Control Over Working Conditions
Do you have control over the working conditions?
Are you working as per your own scheduled time that is different from regular employees?
Do you have control over the tasks that are performed?
If the answers to these questions are no, your contract will fall under the IR35 legislation.
3. Test of Efficiency at Work
Suppose that you had agreed with your end client to complete work in three months, and receive £20,000. If you have completed the task in two months, it shows that you are eager to get additional business. In this situation, your contract with the company will not fall within the IR35 tax regulation.
4. Level of Representation
A deciding factor in determining the employment status in the context of IR35 is the level of representation. Do you represent the intermediary or the company? Are you working using your specialized equipment or software? Do you wear the uniform of the company? The answers to these questions will determine your tax status.
5. Level of Risk
The level of risk in a contract relationship also determines the tax status. Do you negotiate a rate of services regularly? Are you paid a fixed amount? Does the nature of work remain fixed? You should talk with a specialized contractor accountant regarding this matter to know about your tax status.
6. Right of Substitution
If you have the right to assign another person to do work in your place, your nature of work falls outside the IR35. In this case, you won’t have to pay taxes similar to regular employees. You can do this by sub-contracting or sending another person with the same skills and experience as yours to do the task for you.
The right of substitution should be in the contract clause. It should contain details about who should provide the substitute and who would be responsible for the performance of the alternative.
7. Invoice Test
Do you issue an invoice to the end client? If so, your contract with the public or private company does not fall within IR35. You should save electronic or paper copies of invoices to show as evidence of off-payroll status to HMRC.
In the end, you must talk with a professional contractor accountant. The accountant will categorize your nature of work as self-employed or non-self-employed after assessing your case and as per IR35 legislation.