What does being outside IR35 mean?
Unless you’ve spent the last few years
living in a remote cave in the Outer Hebrides, you’ve probably heard about the
changes to IR35 legislation. But even if you have heard all about it you may be
a bit foggy on some of the particulars – especially what constitutes inside and
outside IR35. But before we get on to that distinction, allow the Kingsbridge
team to give you a quick refresher on the new IR35 legislation.
Changes to IR35
IR35 legislation is there to prevent
‘disguised employees’: contractors who, to all intents and purposes, are
employees of their client, but who pay less tax than their employed
counterparts. Your IR35 status is simply put, whether or not you are genuinely
self-employed for an engagement, or if you are a disguised employee.
Prior to April 2021, it was your
responsibility as the contractor (in the private sector, at least) to determine
your own IR35 status. You also held all of the tax liability. This is still the
case if your client qualifies as a small business, but if your client is a
medium or large company then things have changed. The new legislation means
that it is the end client’s responsibility to determine your IR35 status for
your engagement with them, in the form of a Status Determination Statement
(SDS) issued to you. This declares you either inside or outside IR35, but more
on that in a moment. Under the new legislation, the tax liability also shifts,
this time to your fee payer. This is usually either your client or your recruiter,
whoever pays you.
But we know that’s all pretty complicated –
so let’s break it down a bit further.
What’s the difference between inside and outside IR35?
Being found outside IR35 in your SDS means
that IR35 does not apply to you because you are genuinely self-employed for
that particular engagement. Ultimately, this means that you carry on as you did
before the legislative changes. You remain responsible for paying your own
taxes and NICs as you did previously.
Being found inside IR35 however,
means that you are considered a disguised employee for that engagement and so
you will be taxed at source through PAYE by your fee payer. It also means that
you pay the same rates of tax as an employee would, and therefore take home
less of your fees. You also don’t get the same benefits as an employee, despite
being taxed as one.
How will I be assessed?
As we’ve already mentioned, you will be
assessed by your end client and be given an SDS – you’ve probably already
received at least one. Your end client should take due care and assess
your status in response to the main pillars of self-employment used by HMRC,
although some businesses have been making knee-jerk assessments where all
contractors have been classed as inside IR35 in an attempt to mitigate risk.
However, this should not be the case and if you feel a client has not taken
proper care, you do have the right to appeal.
When is IR35 my responsibility?
IR35 legislation hasn’t changed for
everyone. For instance, if your client is based overseas with no branch in the
UK then IR35 remains your responsibility as the contractor.
The other caveat is if your client is a
small business. This means they must satisfy at least two of the below points:
An annual turnover of not more
than £10.2 million;
Not more than £5.1 million on
their balance sheet;
Not more than an average of 50
employees during the tax year.
If this is the case, then IR35 remains your
responsibility to determine.
What if I want to assess myself regardless?
There are a couple of reasons why you might
want to assess yourself. You may want to get a handle on the status of your
engagement so that you can have confidence in your client’s SDS. Or you may
wish to present a completed assessment to your client so that they can take it
into account when making their own.
Either way, Kingsbridge can help. The Kingsbridge
IR35 Status Tool offers an instant, accurate inside or outside IR35 status
determination for just £50 plus VAT. Designed by Kingsbridge’s Head of Tax,
Andy Vessey, the tool asks between 29 and 34 carefully crafted yes/no questions
to get a rounded view of your contract and working practices before giving you
an inside or outside IR35 determination along with a comprehensive report. If
your case is borderline, it’s passed to one of our in-house IR35 experts for a
manual review, giving you complete confidence in your status determination.
If you’d like to assess your status either
for yourself or to help out your client, all you need to do is to head to our
website to get started.