What You Need to Know About IR35

If you are already carrying out work as an Interim Contractor in the UK or are thinking about contracting, it’s important to know how changes to IR35 rules affect you.

Since its inception, the focus of IR35 legislation is to ensure Contractors who are effectively employees pay the same amount of tax and national insurance as regular employees. Contracting and IR35 rules are essentially in place to prevent tax evasion and ensure workers are not underpaid due to being misclassified as Contractors.

As IR35 rules have undergone several changes in recent years, Contractors are responsible for staying up-to-date to avoid any tax issues.

We’ll cover the essentials of IR35 for Interim Contractors and what you need to know about the recent changes.

The Basics of IR35 Legislation

In 2017, the UK Government introduced Off-Payroll Working Legislation, widely referred to as IR35, to the private sector. These rules determine the tax responsibilities of Contractors and the organisations that engage them for work.

IR35 rules are centred on determining which individuals are Independent Contractors (known as ‘outside of IR35’) and which workers are effectively regular employees (‘within IR35’), to ensure they are paying the correct amounts of tax and National Insurance contributions (NICs).

However, not all contracting arrangements fall within the boundaries of IR35. Many Interim Contractors perform their work for clients using an incorporated public services company (PSC), which means they are self-employed and therefore outside of IR35 status.

What Has Recently Changed?

Prior to 2017, Contractors working through a PSC were responsible for assessing their own IR35 status and paying the according tax and insurance amounts.

In 2021, changes to IR35 rules meant that the responsibility for determining IR35 status shifted from Contractors to hiring organisations, specifically those that are medium or large businesses. In simple terms, this change made clients responsible for determining the IR35 status of their Contractors. As a result, many organisations deemed their Contractors within IR35, to avoid penalties and additional tax liabilities.

In September 2022, the UK government’s ‘mini-budget’ enacted another critical change to IR35 – it shifted the obligation of assessing IR35 status back to Contractors, repealing the 2021 rules. However, in March 2023 the government confirmed “There are no plans to repeal the reforms to the off-payroll working rules. The reforms were introduced to tackle non-compliance with the off-payroll working rules and have been successful in doing so”.

How Do Changes Affect Interim Contractors?

Compliance related to IR35 for Interim Contractors will vary according to each assignment and the type of companies that are engaged.

1. Using a Personal Service Company (Ltd)

If you are engaging with clients directly using a PSC, keep in mind that the repeal is not a green light to suddenly determine all their assignments as outside IR35! It is, however, a sensible idea to have each contract assessed by a tax professional to ensure you are compliant. HRMC will be closely monitoring compliance with IR35, so assessing each assignment accurately will help you avoid running into trouble.

2. Working with an Agency

When engaged by a third party – say a Design, Engineering, Technical and Manufacturing recruitment agency – your requirements are relatively straightforward.

The agency will directly employ you under a PAYE arrangement, meaning the agency handles all payroll, tax and NICs on the employer’s behalf. These arrangements are inside IR35, so you don’t need to do anything in response to the rule changes. Of course, the agency should always advise you if the status of any of your assignments changes. As agencies are experienced in handling contracting and IR35 matters, they can help point you in the right direction when you have questions.

3. Using an Umbrella Company

If you are employed by an umbrella company that manages your pay, tax and NIC deductions, your IR35 status will depend on the assignment. Review your contract to ensure you understand your status – if in doubt, speak to your umbrella company to know where you stand. It’s also wise to regularly check your payslips to ensure you are being paid correctly.

What Determines an IR35 Assignment?

As an Interim Contractor, Freelancer or Casual Worker, knowing how IR35 status is assessed can help ensure you know where you stand, whether you are working with an agency or another intermediary.

IR35 legislation has several criteria to determine whether a Contractor falls within IR35 or not, including:

• Control, direction and supervision: What is the degree of control the client (hiring organisation) has over when, where and how you complete the work? The more control the client has, the more likely you will be deemed an employee.
• Substitution: Do you need to do the work yourself? If you are unable to substitute someone else in their place, it’s likely you will be deemed an employee.
• Mutuality of obligation: The central question here is whether the client is obliged to offer you work, and whether you must accept the work offered. If both answers are yes, the arrangement is likely to demonstrate a contract of employment. By contrast, a self-employed contractor isn’t obliged to continue work for a client after a project is finished, nor is the client obliged to continue offering them work.
• Benefits: Receiving entitlements similar to permanent employees, like paid leave or an allowance, is more likely to indicate your arrangement with a client is an employment relationship.
• Remuneration: If you receive a fee that is fixed, guaranteed or based on hours worked, this could point towards an employment relationship.
• Integration: This refers to how ‘embedded’ you are within the client’s organisation. E.g. Are you listed in the company directory? Does the company supply you with equipment, an email address or a uniform?
• Financial risk: Are you responsible for any mistakes in your work and rectifying mistakes in your own time, at your own expense? Do you hold professional indemnity insurance? Both of these factors can help determine whether you are an independent contractor or an employee.
• Exclusivity: As a contractor, having more than one client can help determine your status as self-employed.

Further Advice on IR35

Working as an Interim Contractor is a great way to earn money with more flexibility, so it always helps to know how IR35 legislation affects your earnings and legal responsibilities in the UK. For specific questions about IR35 for Interim Contractors, it’s best to seek out a professional to get personalised advice.

Working with an agency is the easiest way to enjoy the benefits of contracting without the administrative hassles. Here at CV Consulting, our team of Engineering and Manufacturing recruitment specialists connects Contractors with excellent interim opportunities in the UK. Contact us today to start your next great assignment.