IR35 Assessments
Navigating the intricate landscape of UK tax legislation is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: IR35. But what are IR35 assessments, and how is status determined?
Without a proper understanding, your status could be incorrect. If your status is incorrect, you could be underpaying the tax you owe HMRC. Contractors caught underpaying tax, even if it is a genuine mistake, could be subject to interest on the money owed and additional penalties.
In this comprehensive guide, we delve deep into the heart of IR35. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to demystify IR35, empowering you with the knowledge to make informed decisions and remain compliant.
When Does IR35 Apply?
If you are a UK resident for tax purposes and are considering contracting through an intermediary (i.e., a limited company), IR35 must always be considered. The only variability is around whose responsibility it is to conduct the IR35 assessment.
This is an important point that often confuses new contractors who believe that working with small businesses or overseas clients exempts them from IR35. They are incorrect. Working with small companies or overseas clients means the contractor is responsible for the IR35 assessment and is liable should HMRC investigate and find it faulty.
Who Performs The IR35 Assessment?
IR35 applies on a contract-by-contract basis. For each contract, the relevant decision-maker prepares a Status Determination Statement (‘SDS’), which looks at the engagement contract’s wording and the contractor’s day-to-day working practices.
The party responsible for preparing the SDS depends on the industry in which the client operates, the size of their business, and the location they’re based. The responsibility for performing the SDS lies with the end client/fee payer if:
- The client is in the public sector; or
- The client is in the private sector and classified as a medium or large company.
Private sector companies are classified as medium or large-sized if they meet two or more of the following conditions, they:
- Have an annual turnover of more than £10.2 million;
- Have a balance sheet total of more than £5.1 million; or
- Have more than 50 employees.
The responsibility for performing the SDS lies with the contractor if:
- The client is in the private sector and classified as a small company (i.e. does not meet the definition of medium or large); or
- The client is classified as ‘wholly overseas’ with no UK presence.
See our guide to IR35, Foreign Companies and Overseas Contractors for more information on what constitutes ‘wholly overseas’.
The decision-maker responsible for the SDS is also the party responsible for the additional tax liabilities, interest payments and penalties should the assessment be wrong.
How is IR35 Status Determined?
There is no ‘HMRC approved’ template for IR35 assessments. Instead, those responsible must review the contract and the day-to-day working realities against the IR35 rules. HMRC look at both when performing an investigation.
IR35 Assessment Process for Contractors
The responsibility for performing the IR35 assessment lies with the contractor only if you provide services to a private sector client defined as a small company under the Companies Act 2006 or a foreign business classed as ‘wholly overseas’. The end client/fee-payer is responsible for the assessment in all other situations.
Contractors that have to perform their own IR35 status determination should note that there is no specific assessment process. Instead, you need to consider the IR35 rules in conjunction with the written terms of your contract and the day-to-day working arrangements.
When performing the assessment, it’s essential to remember that genuine outside IR35 contracts are business-to-business relationships. The contract will likely be inside if any indications of ‘disguised employment’ exist.
Given the potential costs of getting an assessment wrong, I recommend that contractors who have to perform the review themselves opt for professional help in the form of a contract review. QDOS’ IR35 Contract Review service offers a concise assessment of your contract and working practices, providing a comprehensive report of the engagement’s IR35 status with a clause-by-clause analysis and straightforward suggestions for positive changes.
Warning Over HMRC's IR35 CEST Tool
HMRC claims that their Check Employment Status for Tax (CEST) tool can help determine whether you are inside or outside IR35 for tax purposes. The tool provides HMRC’s view of a worker’s employment status based on the information provided, although using the CEST tool when making employment status decisions is not compulsory.
HMRC has pledged to stand by the results of the CEST tool if the information entered is correct; however, contractors should be wary about using it. Data released by HMRC show that of more than 1 million tool users, 21% did not receive a precise result.
In addition, at least three government bodies were fined after failing to correctly assess the employment status of their contractors, with two of the departments using CEST as their sole assessment method.
Relying on CEST alone isn’t a smart move due to its unreliable nature, and the issues don’t stop there. The tool is too simple and lacks the detail required to assess every contractor accurately. Users have also complained that it is confusing and open to misinterpretation.