IR35 Considerations: The Basics Every Contractor Should Understand

Businesses may need contractors to bolster their workforce and provide specific assistance to their services. Engagements of contractors may operate directly with the individuals or through an intermediary company, often through a Personal Service Company (“PSC”). Businesses must consider the implications of the IR35 legislation, in relation to PSCs, which was introduced to ensure contractors working like employees pay broadly the same tax and National Insurance as actual employees.

IR35 plays a critical role in determining employment status for tax purposes. Understanding whether IR35 applies can cover a mix of considerations. Below, we outline the key elements of IR35, set within some frequently asked questions.

I’ve heard of IR35, but why might it apply to my contract?

At its core, IR35 was designed to distinguish between a genuine contractor and what HMRC refers to as a “disguised employee”. One of the legislation’s main goals is to ensure that individuals who would otherwise be classed as employees, but operate through a PSC, pay the appropriate taxes and National Insurance contributions to HMRC.

If you have an arrangement like this (as client requiring services or as the provider of services through a PSC) which resembles that of an employer and employee, you should really be considering IR35 and what HMRC consider if they were to assess your arrangements and any supporting contract.

Where are the key provisions I should keep in mind before proceeding with an arrangement considered to be “outside IR35”?

We have produced a helpful table as a guide to understand some key IR35 indicators. This should assist with determining whether your contract is either “inside IR35”, or “outside IR35”.

Some contractual provisions may not be particularly clear and in some scenarios a contract’s clauses may point towards employment, while others suggest self-employment, or even fall somewhere in between on the sliding scale. There may also be valid reasons for an arrangement to have one of the areas structured as more of an employment style arrangement.

It is advisable to have experts review your contract in its entirety to consider the overall picture.

Anything else to consider if taking an assignment of an arrangement claiming to be “outside IR35”?

As well as assessing the contract to be assigned, against the above table, it is important to note some further contractual provisions which should be kept in mind when accepting, or working on an assignment, that claims to be “outside IR35”:

• Does the PSC submit bids or give quotes to get work?
• Is the PSC under direct supervision when working?
• Does the PSC, or individuals comprising the PSC, get holiday or sick pay when not working?
• Is there any entitlement to any other statutory payments, like maternity or paternity pay?
• How is the contract presented? Is it a “contract for services” or “consultancy agreement” that uses terms like “self-employed”, “consultant” or an “independent contractor”?

Do keep in mind that the list above is not exhaustive and in determining whether a specific engagement falls within the remit of IR35, it is crucial to look at the contract itself, the intentions of the parties, as well as the actual working arrangements of the individual worker.

Be cautious to simply rely on words as what matters more than wording is the actual working arrangement, not just how the contract is labelled.

Where a contract is provided which claims to be “outside IR35”, but in reality, the working practices resemble those of an employee, HMRC may deem the engagement as “inside IR35” and, therefore subject to Income Tax and National Insurance contributions.

Does it really matter that much? What happens if HMRC investigate a contract I am working on and deem it “inside IR35”?

HMRC investigations can come out of the blue and are usually time-consuming and in-depth. If your PSC is found to have completed work / you as client have engaged a PSC under an agreement which claimed to be “outside IR35”, whereas in actual fact HMRC deems it “inside IR35”, you could be faced with having to correct and pay Income Tax and National Insurance contributions on any earnings received, as if it was an employer and employee relationship.

Furthermore, HMRC have the ability to impose penalties for non-compliance so you could be faced with a large backdated tax bill, interest and penalties arising from the engagement.

I’m still unsure as to whether my contract is “inside” or “outside” IR35. What should I do?

Understanding your contract’s IR35 status involves careful examination of a range of factors, such as your contract terms, the type of work you undertake, and your role within the client’s business.

It is advisable to discuss any concerns you may have directly with the other party involved so that everyone is on the same page. However, contractual terms may often be difficult to understand and we would always recommend that an independent contract review is carried out to determine a contract’s IR35 status.

How can JLN help?

Here at The Jonathan Lea Network, we have experience reviewing consultancy agreements to ensure that they as far as possible comply with HMRC’s IR35 expectations, or the parties at least understand how their terms could be improved.

If you are concerned that a contract your company is due to accept (or indeed one you are working on already), may be “inside IR35”, we would be delighted to try to assist you.

For all new matters, we offer a 20-minute introductory call to understand your situation and ascertain how we can help. To get in touch with us, please email wewillhelp@jonathanlea.net or contact us by telephone on 01444 708 640.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.