IR35 refers to the UK’s off-payroll working rules which aim to decrease so-called ‘disguised employment’, whereby a company hires a member of staff through a company set up by the staff member to avoid paying income tax and National Insurance Contributions (NICs).
There are a number of criteria that HMRC look at when deciding whether a worker falls within the IR35 rules or not. These include:
- Is the worker an office holder (director, trustee, secretary, board member etc.)?
- Can they send a substitute in their stead?
- Does the client have the right to reject the substitute?
- Can the client change tasks ad-hoc or does a new contract need to be negotiated?
- Can the worker decide how, when and where the work is done?
- Does the worker have to provide equipment/materials?
- Do they pay their own vehicle costs?
- How are they paid?
- Do they receive additional corporate benefits by the client?
- What happens if a mistake is made?
- Does the worker have management responsibilities?
HMRC has a tool you can use to assess whether you are covered by legislation. If you are, you are a ‘deemed employee’ and have to pay income tax and NICs as if you were employed. In theory, if you are genuinely working as a consultant, contractor or freelancer, you shouldn’t have anything to worry about as far as IR35 is concerned.
You can see more about income tax and NIC thresholds and rates in our article here.
Umbrella companies are organisations that act as middlemen for contractors and the client, and organise payment of the contractors. The contractor outsources its payroll functions to the umbrella company, which handles the pay of the employee and makes any necessary tax deductions. The use of umbrella companies is completely legal. However, a spokesperson for HMRC has said: “It is illegal for workers to pay the national insurance contributions of employers and HMRC cracks down on any abuse of PAYE rules.”
As with all interactions with HMRC, we always advise clients that a transparent and common sense approach are always the best ways of ensuring minimal checks and follow ups.
If you would like any further information about IR35, or would like us to check whether you might fall within IR35 rules, please get in touch.