IR35 is a set of rules that applies to workers who provide their work through an intermediary party. The rules would apply to anyone who is contracting either under an umbrella company (agency) or through their own limited companies.

This video will explain what IR-35 is and how it will affect over 50% of people working in the construction industry.

Let us put you in the shoes of how 50% of professionals within the construction industry currently pay taxes.

So you currently work as a contractor through your limited company, often termed personal service company where you are the sole employee, you either go direct to the end client to obtain work or through an agency, and you charge out your services at an agreed day rate.

You usually pay yourself less each month than what you’re actually earning, often minimum wage with the majority of money going towards your limited company profits. Come the end of the year your limited company is cash rich, which allows you to pay yourself a rather hefty lump sum, known as a dividend payment.

Now a dividend payment is subject to lesser tax implications, than being a permanent employee for a larger corporation on their payroll. Being a permanent employee you’ll be subject to monthly PAYE, national insurance, and pension contributions consequently, the amounts payable each month to HMRC will be far more substantial based on your day rate versus someone on minimum wage.

Hence why so many professionals within the construction industry have opted to work this way and with the nature of certain projects being for a limited time period, it’s also suited larger companies to pay an increased day rate to allow the flexibility to move with any given workload and to hire and fire contractors as their current order book dictates.

The reason people have been able to work this way for so long is because the current IR35 rules state the onus is on the contractors limited company, to determine the status of their employment for each individual assignment. Effectively, the individual contractor is determining their own rate of pay, their own tax returns, and their own fate, and is exactly at this point that the reformed IR35 rules will turn the current equilibrium on its head and where it creates shock waves throughout the industry.

Quite simply the new rules means the onus of determining employment status will be transferred from the contractor to the company who actually employs them, and along with it all the legal obligations to pay HMRC owed taxes. So, if it is deemed that the contractor is treated as a permanent employee then the company in question becomes liable to pay all of the fees and tax contributions that they would otherwise need to pay if they employed the individual on a permanent basis.

This would include PAYE, national insurance contributions and pension contributions. If it is found that the company employing the contractor or agency is not abide into these rules, then they will be subject to extremely large fines. The added responsibility may force many companies into neglecting the contractor route, and to only offer permanent roles as they feel it may be easier, less risky and take away the danger of those heavy fines.

Despite this it’s not necessarily the end of personal service companies and contracting. Determining employment status is a notoriously grey area, and a hard thing to do and will need to be taken on a case-by-case basis.
Ultimately the reformed IR35 rules seek to turn a legitimate one-person small business, into being an employee, so naturally the rules are underpinned by the UK employment legislation and undergo the following principle test of employment.

One, control. What degree of control does a client have over what, how, when and where the worker completes the work.

Two, substitution is personal and direct service by the worker required or could a different worker with the same skills take their place.

Three, mutuality of obligation. This is a concept where the employer is obliged to offer work and that worker is obliged to accept it this, is a normal relationship between employer and employee and within the bounds of a job description can be asked to undertake a whole range and spectrum of activities.

If you are a contractor who is currently self-employed you may need to ask yourself these questions. Does the company you work for supply you with equipment such as a laptop, printer, and phone? Do you work full time 37 and a half hours a week and for one company and one company alone? Does the work you carry out for that company include a vast array of tasks depending on what the daily or weekly requirements are? Do you work for a medium or large company and sit with other full-time employees in their office or part of their team?

If an individual answered yes to all or some of the above, then under the IR35 rules it’s very likely that they’ll be deemed a permanent employee, and that the individual and the company they are carrying out work for would be liable to pay normal tax contributions.

If an individual answered no to the questions then it’s likely they will not fall under the new IR35 rules and they are not deemed as a permanent employee.

Although as mentioned before IR35 is notoriously grey, so even if you answered no to all the questions you may still be deemed as a permanent employee. It’s important to note that the new rules will only apply to those contractors who work for an organisation that falls into the medium or large brackets. Contractors carrying out work for small companies will not be affected.

Disclaimer we are not providing legal advice in this area please seek professional legal advice for more information matron a commercial hub to your business.

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