What is IR35 and how does it impact contractors?

What is IR35?

If you are based in the UK and are a contractor (or work as a business that hires contractors) you have probably come across IR35, especially in recent times. 

IR35 is used to describe legislation put into place to help tackle tax avoidance by workers (and companies hiring their services) through an intermediate limited company when the individual providing the services is completing the work of a regular employee – a “disguised” employee.  

IR35 was originally introduced in 2000, and all contractors were responsible for assessing their own IR35 status. As of 2017, in the public sector, the onus has shifted from the contractor to the client in the public sector. From April 6th, 2021, the responsibility will also lie with the client in the private sector.  

Riverflex’s stance on IR35

There has been ambiguity regarding the tax situation for independent contractors for a number of years as well as delays to the implementation of IR35 which has led to a lot of uncertainty for people and businesses working this way. Ultimately IR35 will generally take the risk away from the independent contractor which can only be a good thing for individuals operating in this way. It is now up to larger companies and intermediaries, who have more resources and access to professional advice, to put the right governance and process in place to be compliant. Our hope is that this will create a more consistent and fairer ecosystem for independent contractors, who provide vital specialism and flexibility to businesses. This may cause challenges for contractors in the short term with businesses avoiding the use of contractors to minimise their risk, or rates being impacted due to additional tax obligations. But this should normalise over time particularly in high demand and scarce areas where there is value such as digital, data and innovation. 

We generally provide outcome-based services to our clients hence expect our sub-contractors to provide high-quality services to our clients on our behalf. They are the experts in their domains so they should determine how to deliver the services, they should provide the right quality people to do this and if the services don’t meet our quality standards, then they bear the risk of addressing this. We assess our contracts and working practices and generally, this type of commercial relationship falls outside of IR35. But we also have clients who want to augment their workforce with specialists and in these situations, it will generally fall within IR35. 

What does this mean for contractors/independent consultants?  

From April 6th, 2021 onwards, medium and large businesses, both in the public and private sector, will be responsible for determining the IR35 status for the contractors they work with. This means that if you are a contractor and are working for a small business* through your limited company you will be responsible for assessing your IR35 status (i.e., whether you are operating inside or outside IR35). We have provided an example highlighting what it means to operate ‘Inside’ or ‘Outside’ IR35 below.  

*Clients are classified as small if their annual turnover is less than 10.2 million pounds, they have a balance sheet total of no more than 6.1 million pounds, and they have no more than 50 employees. 

Who does it affect? 

IR35 affects independent professionals that are UK residents, work through an intermediary, and are self-employed. In order to better understand if and how you, as an independent consultant, are affected by IR35 you need to determine whether you are operating as a genuine business or that of a ‘disguised employee’ also referred to as a ‘deemed employee’. There are three main criteria used to help determine where the independent consultant sits: 

1. Personal service/right of substitution: As a business, you are able to determine the resources that provide the services and they should be interchangeable, therefore, you should not have to provide the contracted services personally. 
2. Control: If you are genuinely providing a service then your business determines what, where, when and how the desired services are completed. This should not be influenced by the client. 
3. Mutuality of obligation(MOO): Are you as a services provider obliged to accept work put forward to you? If you are working as a contractor and are working outside IR35 the client should not expect or request further work.  

To help understand the key differences in working practices, we have outlined an example below of what it means to work “Inside” versus “Outside” IR35.  

How to know if you are inside or outside of IR35? 

It is important to understand what it means to be inside or outside of IR35 when having your status determined*. 

Let’s use an example…

John has a limited company called Consulting Services Ltd. and has recently worked on two projects 

In his first project: 

• He was required to carry out what he was contracted to do personally 
• Should his work be rejected, it would be corrected at the client’s cost 
• He was supervised closely, by someone in the client’s business  
• He was working through Consulting Services Ltd. but was receiving employment benefits  

These working conditions reflect those of a regular employee, and therefore he would likely be deemed to be operating ‘inside IR35’ in this case scenario.  

In his second project:  

• He has the right to delegate and substitute his contracted work onto another individual 
• He did not receive any employment benefits 
• He was paid on a project basis at a fixed price  
• Should his work be rejected, it would have to be corrected at his own cost 

These working conditions reflect those of a contractor providing their services to help a client, and therefore would like to be deemed operating ‘outside IR35’ in this case scenario.  

*Please note this a non-exhaustive example and we recommend getting your working practices evaluated and scrutinized by relevant professional advisors.