As specialist interim recruiters, we often are asked about IR35 rules 2023. We’ve complied an easy reading, short guide to help get familiar with the current IR35 legislation.
- Introduced by Gordon Brown in the 1999 budget
- The term ‘IR35’ stands for the Inland Revenue’s (now known as HMRC) 35th press release
- IR35 rules Introduced to combat tax avoidance via the use of ‘personal service companies’
- IR35 rules targets contractors who have a limited company business structure and who have previously enjoyed some tax efficiency. Otherwise known as ‘disguised employment’
- In its basic form, the IR35 rules say that if you are treated and act like an employee, you should be taxed in the same way as other permanent company employees
- As with all of these schemes, there is some ambiguity within the legislation and so it’s left a lot of employers and contractors feeling uncertain about IR35 determination within both the public and private sector
- A grace period was initially allowed – no penalties were given by HMRC for incorrect IR35 assessments before 6th April 2022. However HMRC could still demand the tax liability for this year, even though a penalty would be avoided before this date.
- As a result of the ending of this ‘grace period’, compliance activity within the private sector will significantly increase in 2022 and beyond.
IR35 public sector legislation
- The IR35 public sector reform was introduced by HMRC in 2017 because of non-compliance within the sector
- This IR35 public sector reform announced changes in the way IR35 status was determined; all public sector bodies were now responsible for setting the IR35 status of the contractors they engage, whereas previously this burden was on the individual contractor
- This change was made because public sector bodies are thought to know the role, the responsibility, the project and the tasks better than the external contractor
- As a consequence, the body is able to better determine the IR35 rules and whether a contractor would be inside or outside IR35
- Contractors are entitled to know the reasons behind the IR35 determination made by the employer in a Status Determination Statement, which the contractor can dispute
IR35 private sector legislation
- The IR35 private sector reform was introduced by HMRC in April 2021, bringing the public and private sector rules in line with each other
- The new IR35 private sector rules mean that medium and large businesses now carry IR35 responsibility as well as the fee paying party in the process, which is often recruitment agencies
- Again, contractors are entitled to know the reasons behind the IR35 determination made by the employer in a Status Determination Statement, which the contractor can dispute if they see fit
- If you are a candidate working with a recruitment agency, discuss the IR35 rules with your consultant in detail so they can place you at an employer with relevant projects that suit your IR35 status
- The IR35 private sector legislation states that small businesses are exempt. A small business is one that is defined by the following criteria for 2 years in a row:
1) annual turnover of no more than £10.2 million
2) balance sheet total of no more than £5.1 million
- If you are a private sector employer, and your business is a small business, you are not required to work out the IR35 status. In this case, the contractor will still be responsible for working out their IR35 determination
IR35 inside or outside
- Being inside IR35 means the contract falls within the IR35 rules (off-payroll rules) and HMRC sees you as an employee of the business, for tax purposes. This means the contractor must pay income tax through payroll, in the same way as another employee of the business – full PAYE and National Insurance contributions
- Being outside IR35 means the contract falls outside of the IR35 rules (off-payroll rules) and HMRC sees the contractor as a self-employed worker. This allows for some tax efficiencies when using a combination of salary and dividends. In simple terms, clients pay the contractor an agreed fee for their services, who will maintain responsibility for paying their taxes via self-assessment, just like any other small business owner
IR35 rules 2023: IR35 inside or outside?
Are you IR35 inside or outside? 3 categories are considered within IR35 rules 2023 and whether you are an employer or contractor, you’ll need to consider these 3 areas to come to a robust IR35 determination;
IR35 inside or outside: Supervision, direction, control
The first category is supervision, direction, control. This category looks at how much say the employer has over how and when the contractor works or does the contractor have complete freedom over how work is completed. The more control, the more this implies you are an employee and therefore are inside IR35. Other things to consider are whether the contractor will be dedicated only to the agreed task, making a contractor outside IR35 or whether they will be asked to work on other tasks within the business, making them inside IR35.
IR35 inside or outside: Substitution
The second category is substitution. This asks the question – could someone else complete the work instead of the contractor, or does the work need to be specifically completed by them? If you can’t send someone else, you’re likely to be inside IR35.
IR35 inside or outside: Mutuality of obligation
The third category is mutuality of obligation (MOO). If you as an employer offer work, is there an obligation for the contractor to accept? If so, this is a sign that the contractor is working within IR35. A sign of a contractor working outside IR35 is when the contractor is engaged on a project-by-project basis and is allowed to be working across several different companies at the same time. If this is not allowed by the employer, this points towards being inside IR35.
IR35 inside or outside: other considerations
Above and beyond the 3 main criteria of supervision, direction and control, substitution and mutuality of obligation, an employer should consider:
- Equipment – to be outside IR35, a contractor should use their own equipment
- Financial risk – does the contractor have professional indemnity insurance? If they do, this points to being outside IR35.
- Payment – someone who falls outside of IR35 is usually paid on a project-by-project basis rather than a set figure monthly.
- Company structure – if contractors become so ingrained that they become part of a company’s structure, with people reporting to them for example, this points to employment rather than self-employment
- How a contractor runs their business – if the contractor has their own premises, websites, employees etc, its likely they will be seen as outside IR35.
IR35 deemed payment
- If the contractor is in the private sector and the IR35 rules apply, the intermediary will need to calculate the deemed employment payment
- The IR35 deemed payment is the amount deemed to be the income of the worker, once deductions and employer National Insurance contributions have been removed
- The government have complied a Deemed Employment payment calculator to help calculate IR35 deemed payments
IR35 rules 2023: liability
- If a ‘outside IR35’ status determination was incorrect, all income received is classified as employment income. Any liability plus interest must be owed back to the HMRC and a penalty fine may also be incurred
- Under the off-payroll rules, this liability sits with the fee-payer should every party of the engagement have met their obligations
There is currently some ambiguity around IR35 rules in 2023, therefore it is advised to look thoroughly at HMRC and Government resources around IR35 topics. We have a specialist interim and contract recruitment team in-house who can help both candidates and employers to understand and navigate the rules as required.
If you need to hire for a interim position, contact us today and we can help get you started on the hiring process. If you are a candidate, drop us your CV here and search our current available contract jobs.