What does IR35 tax mean for your business?
Rules that determine tax status for contractors has changed but what exactly does that mean for you and your business? Keith Tully, a partner at Real Business Rescue, explains….
Off-payroll rules and IR35 are interchangeable terms used to describe Intermediaries Legislation – a tax rule that determines the tax status of contractors when working on selected contracts. Kitchen, bathroom, and bedroom retailers may also inherit the responsibility to determine the tax status of contractors.
What is IR35? How is IR35 tax status determined? Do I need to worry about IR35 status when hiring a contractor? These are all common questions asked by kitchen and bathroom retailers when hiring contractors since the IR35 reform.
What is IR35?
IR35 is a legislative measure that aims to crack down on disguised employees – individuals that use an intermediary such as a limited company to their tax advantage when, in reality, they should be classed as an employee and taxed accordingly.
Limited company contractors operating outside IR35 pay less income tax and national insurance contributions (NIC).
Contractors inside IR35 pay a similar rate of income tax and national insurance contributions to an employee, whereas limited company contractors outside IR35 pay less income tax and NIC.
IR35 rules concerning public and private sector contracts have changed over the years as HMRC targets individuals that misuse a personal service company (PSC) to avoid paying taxes. As such, contractors’ appetite to engage in contract work in certain sectors has also been dampened due to increased red tape. The IR35 clampdown is expected to raise close to £3 billion by 2024 in national insurance contributions and income tax.
A contractor’s IR35 status is determined by a handful of factors that can be assessed by reviewing working practices, contract wording and whether the contract mirrors a traditional employment arrangement.
What factors determine IR35 status?
A top-level understanding of the key factors that determine IR35 status includes the right to substitute, control/supervision and mutuality of obligations.
Personal service/substitution: Is the client dependent on a personally delivered service as with an employee, or does the individual have a right to send a substitute to carry out the work? If the right to substitute is incorporated into the contract, this is likely to strengthen the argument that the contract is outside IR35.
Control: Is the contractor under the direct super–vision of the client? Does the client control the way contractor services are provided? For example, shift times and lunch breaks.
Mutuality of obligations: If the contractor expects to be continually fed work and the hiring body expects the contractor to accept work as and when offered, this arrangement mirrors that of an employer and employee. Each contract should be individually assessed as making blanket IR35 decisions are unlawful – this is when the hiring party conducts one assessment to determine the tax status of multiple contractors that are engaged in the same role.
Who determines IR35 status?
IR35 status can be determined by the contractor or the client, although this will depend on the sector the client operates in.
Public sector – From April 2017, the responsibility for determining the IR35 status of contractors working on public sector contracts was granted to the hiring party.
Private sector – From April 2021, the responsibility for determining the tax status of contractors working for medium and large-sized private sector businesses was assigned to the hiring body (client), rather than the contractor.
What retailers need to know about IR35 when hiring a contractor?
Contractors are fundamental to the development, production and installation journey of kitchens and bathrooms. They are essential service providers to the retail industry as without their offering, projects would fail to come to fruition.
From kitchen and bathroom fitters, renovation specialists, to structural engineers, contractors are often the face of the brand on the front line as they are integral to site visits and house fit-outs.
As the nature of each kitchen and bathroom project will vary, including location, project length, complexity and services required, the dependency of retailers on contractors is absolute, and hirers must therefore be acquainted with the onboarding process, including taxation and any additional responsibilities that may be assigned, such as determining IR35 status.
The determination of IR35 tax status will sub–sequently shape contractor take-home pay. IR35 has been the cause of much uproar as industry bodies claim that it disincentivises genuine contractors from engaging in particular private- and public-sector contracts.
Hirers will be required to absorb the cost of hiring an IR35 contractor and overcome the burden of determining tax status in return for access to an unrestricted talent pool of contractors across the country. They are the reason retailers can invest in a broad range of expertise on a project-to-project basis and offer an end-to-end service.
• For more info, visit www.gov.uk/guidance/understanding-off-payroll-working-ir35