Kingsbridge obtain latest CEST usage data
New information reveals that HMRC’s CEST tool, was unable to provide an answer regarding a contractor’s IR35 status over 278,000…
What does outside IR35 mean? To answer that, we need to look at what IR35 is and how it has…
What does outside IR35 mean? To answer that, we need to look at what IR35 is and how it has changed in recent years, causing significant controversy and upheaval in the contractor market along the way.
IR35 (also known as the ‘off-payroll rules’ or ‘intermediaries legislation’) has been around since 2000 to prevent ‘disguised employees’ and tax avoidance. In 2017, major changes began for the legislation, namely, the end client would have to determine a contractor’s IR35 status rather than the worker.
This was first introduced in the public sector in 2017, and then in the private sector in 2021. It was almost repealed under Liz Truss’ government in autumn 2022, before the repeal of the reforms was itself reversed. At the time of writing, unless a business is defined as ‘small’ or is based entirely overseas (and therefore out of HMRC’s grasp), the responsibility now sits with the end client in terms of determining whether a contractor’s engagement is inside or outside IR35.
In this blog, we explain exactly what it means to be ‘outside IR35’. But first, we’ll provide you with a quick refresher on the legislation.
Initially, the self-employed were responsible for defining their IR35 status. Now, in both the public and private sector, that obligation lies with the end client for the engagement in question – specifically in the form of a Status Determination Statement (SDS) given to the contractor.
It’s important to note here that this isn’t the only change. Under the new legislation, the tax liability also shifted – this time to the fee payer who pays the contractor (usually the end client or the recruitment agency).
Other than this, IR35 remains very much the same. Its purpose is still to prevent ‘disguised employment’, when contractors who are essentially employees pay less in Income Tax and National Insurance Contributions than their employed counterparts. IR35 – or employment – status is simply whether or not a worker is genuinely self-employed for an engagement for tax purposes.
Being found outside IR35 for the engagement in question means that the rules don’t apply to the contractor because they’re genuinely self-employed for tax purposes (though a separate SDS would need to be carried out for each engagement). As a result, they remain responsible for paying their own taxes like Income Tax and National Insurance Contributions.
Being found inside IR35 for an engagement, on the other hand, means that the contractor is considered a disguised employee for tax purposes and will be taxed at source through PAYE by the fee payer. They’ll pay Income Tax and National Insurance Contributions to the same rates as a permanent employee, reducing their take-home pay – despite not receiving the same benefits.
Given that the contractor is assessed by the end client and supplied with an SDS, the end client needs to take reasonable care. They must assess the worker’s status in response to HMRC’s guidelines around self-employment, which are based on case law.
There have been instances of some businesses making the decision to try to mitigate tax risk by not engaging with limited company contractors at all. Since these organisations don’t engage with them and therefore don’t assess their working practices, the IR35 rules don’t apply.
IR35 legislation hasn’t changed for everyone. For example, if the end client is based overseas with no UK branch, then IR35 remains the worker’s duty.
The same is true if the client qualifies as a ‘small business’, where they meet two of the following criteria:
There are a lot of tools on the market that can determine whether a contractor’s engagement is inside or outside IR35, including HMRC’s free CEST tool. A word of caution, though: it’s not the most reliable, as we outline in our latest annual whitepaper. That’s why many have turned to alternative platforms.
One such platform is the Kingsbridge IR35 Status Tool. Designed by our Head of Tax, Andy Vessey, it asks between 29 and 34 carefully crafted yes/no questions to gain a rounded view of the worker’s contract and working practices. You’ll then receive an inside or outside IR35 determination along with a comprehensive report. If the case is borderline, it’s passed to one of our in-house IR35 experts for a manual review, assuring complete confidence in the status determination.
The tool can be used by contractors, recruitment agencies, or end clients. For each, it offers different benefits.
Our IR35 Status Tool is ideal for contractors who still need to determine – or want to take some care of – their own employment status. Perhaps they want to have confidence in their client’s SDS, or they may want to present a completed assessment so that their client can consider it when making their own. Likewise, they can use it as evidence if they disagree with the status that has been provided to them.
While end clients are now responsible for a worker’s employment status in the majority of cases, there’s no actual guidance when it comes to the process they need to follow. Our IR35 Status Tool provides a platform for the client to accurately look at and determine status. As a result, they fulfil all their obligations with minimal hassle.
Where end clients don’t want to engage contractors due to IR35 and the subsequent financial risks, our tool enables agencies to offer peace of mind and provide the opportunity to do so. This is because recruiters can give their clients access to use the tool. It provides a transparent, accessible view for everyone. What’s more, determinations are insurable and a dispute resolution process is built in.
Seek specialist advice from the IR35 experts.