You may have heard of the mysteriously-named IR35 regulations also known as off-payroll working, or you may not. Either way, if you are the owner and operator of a limited company which provides services to other companies, you should be familiar with the IR35 rules which IR35.

So what exactly is IR35?

IR35 is the way HMRC describe the regulations which set out whether or not you are considered an employee of an organisation you’re doing work for. It is also referred to as intermediaries legislation and was primarily designed to stop consultants working for companies but avoiding paying income tax and NI by just operating through a limited company.

Critically you don’t get to choose to be an employee or not, there are a series of tests that your contract and work must meet.

So how do I know whether I should be on the payroll or not?

HMRC has developed a tool which will quickly determine whether or not you should be on the payroll of the client you are working for.

It essentially swings on:

– Whether or not you could send a substitute to do the work you are undertaking, without the client wanting to vet or approve that substitute
– Whether you would have to pay the substitute if one was needed
– Whether you are an “office holder” for the client’s company – for example, are you a board member? (There’s a full description in the tool of what this means)

What are the risks?

If you have been working in the public sector and you are deemed to be within the IR35 regulations and therefore an employee of your client, they will have to add you to the payroll and make any relevant contributions, as well as paying the income tax and NI on any money you have been paid.

If you have been working in the private sector you will be liable to pay back the income tax and NI.
Being on the payroll also means you can’t claim for other expenses such as travel or subsistence in relation to that contract.

HMRC can also go back through 20 years of tax returns to investigate whether other similar situations have occurred and may choose to try to reclaim all of the relevant tax and NI.

We have heard of examples of clients sending out a standard HMRC letter and form to their contractors to help establish their IR35 status. Some are even suggesting they will simply put all individuals who operate through a limited company on the payroll, rather than have to figure out who should be on it and who definitely shouldn’t.

What should you do?

There are contract review services which you can use to look at any contract you are being asked to sign to identify any IR35 risks. You could also choose to take out an insurance policy to cover the cost of any investigation and tax/NI you need to pay back.

Also, some organisations, such as IPSE, (Independent Professionals and Self Employed) provide guidance and members benefit from access to specimen contracts.

Give us a call if you think IR35 could apply to the work you do as it’s important you understand your risks and obligations.