Are you inside or outside IR35?

With IR35 due to be introduced to the private sector by April 2020, contractors need to start reviewing their contracts or they may find themselves paying a higher rate of tax.

Those who fail IR35 reviews will be eligible to pay any excess tax and National Insurance contributions owed to HMRC. If these are found to include the previous tax year, the late charges will be applied alongside any interest.

Once implemented into the private sector, the legislation will be applicable to contractors regardless of the industry they work in. For example, within the IT sector, it will affect all specialisms including Networking & Infosec, Software & Web Development and Business Transformation.

With a limited company’s bottom line and time at stake, it’s important for contractors to stay vigilant and know the criteria used by IR35. Typically, this can be done by asking a few simple questions.

Is the contractor the only person for the job?

If a job is the sole responsibility of one contractor and can’t be passed to another, then there’s a chance this could fall within IR35. If a contractor could send someone in their stead, then they can protect themselves from the higher taxes implemented by IR35. If only one specific contractor can complete the job, then it is more like an employer to employee relationship, which IR35 has been designed to cut down on.

Does the contractor have more than one client?

Typically, employees in a permanent position only have one job while self-employed contractors have multiple clients. As IR35 looks to stop employees cutting their taxes by working in the same role through a limited company, the number of jobs a contractor takes on will be analysed by HMRC.

Consistently working for only the same client shows a typical employer and employee relationship which would lead to the contractor being treated like an actual employee from a tax perspective.

Do clients pay for the job or time?

The way contractors work out their fee also comes under scrutiny from the soon-to-be-implemented IR35 legislation, with the main question asking if they are paid by the hour or for the job as a whole.

If an IT contractor is tasked with a job, they should be providing quotes for the job, not their time, as this falls outside IR35. However, if money is paid on an hourly, daily or weekly rate, then in the eyes of the new legislation the contractor can be counted as an employee.

Does the contractor have flexible hours?

One of the benefits of being a contractor is the flexibility afforded when it comes to working hours. To be outside IR35, contractors need to have plenty of autonomy when it comes to how, when and where the job they’ve received is completed.

Employees are typically scheduled and kept on set hours. So, if a contractor is found to be working in a similar way, then they may suffer from IR35 taxation.

Where does the equipment come from?

Usually, self-employed contractors provide their own equipment to complete the job and the introduction of IR35 to the private sector means this will be checked. An IT contractor would be expected to own their own computer, so if an employer provides this, it could cause the legislation to increase the tax the employee pays.

If the answer to most of these questions falls outside of IR35, then you should be safe from the higher rates of tax. However, it’s not a 100% accurate method and only a thorough review conducted by an employment law specialist can give you a definitive answer.

Fortunately, falling into IR35 doesn’t mean you have to stop working, it just means you’ll be working on a tax rate similar to a full-time employee. IR35 is also investigated on a case-by-case basis, so being caught by IR35 on one assignment doesn’t apply it to every job taken.

At Senitor, we’re constantly helping IT contractors find their next role. So, if you’re looking for new contract opportunities, get in touch today and see how we can help.