Inside IR35 & working via an umbrella company
Inside IR35 & working via an umbrella company… So you have been offered an assignment and been told that the role is Inside IR35, but what does this really mean to you if you are working via an umbrella company?
Well IR35, or the Intermediaries Legislation as it is also known, is only relevant if you work through your own Limited Company. So if you’re working via an umbrella company, you can forget about it!
HMRC decided, many moons ago, that some people who had opted to work via their own Ltd Company (or Personal Service Company / PSC) actually looked like they should be employees. With this in mind they deemed that they should therefore be paying taxes as an employee. This meant a contractor caught falling foul of the legislation (inside IR35) would have to pay tax through PAYE – income tax.
If the legislation doesn’t apply (an outside IR35 verdict) then you can claim dividends from your Ltd Co. These do not attract national insurance contributions.
Inside or Outside IR35?
The Intermediaries Legislation has been updated over recent years and in 2017 we saw changes to the rules applied in the Public Sector.
In previous years, the contractor was the one who could determine their IR35 status, however the perception from HMRC was that the rules were not necessarily being applied correctly. With this in mind they decided that it would now be the responsibility of the engager to determine the status and if an inside IR35 verdict was given then employment taxes would be due. These would now have to be deducted at source by the end client, or if the contractor opted to work via an umbrella, the umbrella would ensure that these taxes were paid over to HMRC.
The Government are now proposing to introduce the same working into the Private Sector and in April 2020, we could see the same rules apply to any medium / large businesses who take on contract workers.
Even though the determination sits with the engager, these 3 main points still apply and this is noted in the simplest terms possible at this point. Please note that it would never be this simple if placed in a courtroom!
1. Supervision, direction and control
Does someone tell you what to do and when and how to do it?
If they do – inside!
2. Mutuality of obligation
Are you obliged to accept work and is the agency/client obliged to offer it to you?
If the answer’s ‘yes’ – inside!
3. Right of substitution
If you can’t work for any reason would you be allowed to send someone in as a replacement?
If the answer’s ‘no’ – inside!
HMRC suggest an end client make use of the CEST Tool (Check Employment Status for Tax) to determine the IR35 status for an assignment. The test runs through a series of questions, which relate to the aforementioned considerations. The test can be found here https://www.gov.uk/guidance/check-employment-status-for-tax.
The end client is then required to provide each contractor with a Status Determination Statement or SDS for short. It is worth noting that the actual status depends on what you do as much as what may be written in your contract. Some companies offer services to re-write your contract to make it compliant with IR35 – if it accurately reflects what you do then that’s fine but if it bears no relation at all to what you do at work then you are likely to be in trouble in the event of an investigation by HMRC.