In summary, the terms indicate your IR35 status as being a genuine contractor (outside IR35) or an employee for tax purposes (inside IR35).
The term ‘Inside IR35’ means that you are treated the same as an employee of your end client but, for PAYE purposes only.
If you are considered ‘Inside IR35’ you need to ensure that you are paying the appropriate contributions to HMRC. This usually means that you make a ‘deemed payment’ at the end of the tax year in which you have worked for an end client. You should also reassess your status if and when you begin a new contract.
From April 2020, if you are engaged with the public sector or a medium to large private sector business via a recruitment agency, they will be required to deduct your tax and National Insurance Contributions at source. As many recruitment agencies and clients are not set up to manage contractors through a standard payroll, they may only engage you via an umbrella company which will act as your employer. There may be a fee payable for this.
Should you face an IR35 enquiry and be found to be operating ‘Inside IR35’, HMRC will raise a determination for Tax and National Insurance plus interest which should have been paid during the accounting period, and you may face a penalty.
To be ‘Outside IR35’ means that you are operating as a genuine business and therefore operating outside of the IR35 rules. You are able to pay yourself a salary and draw the remainder of income as dividends with the appropriate rate of HMRC contributions payable at the end of the accounting period.
From April 2020, If you are engaged with the public sector or a medium to large private sector business, your end client is responsible for determining your status.
If they deem you as ‘outside IR35’, your fee should be paid as normal and you will be responsible for managing your own taxes.
How do I know if I am inside or outside IR35?
From April 2020 all public and private sector companies will be responsible for determining your IR35 status.
End clients may try to simply place all of their Personal Service Company contractors inside IR35 to avoid administration and liabilities, but this is not compliant with the new legislation. Alternatively, they may place contractors based on their job role, but this is fraught with issues when it comes to compliance.
To determine your status, you are advised to have your written contract reviewed for IR35 compliance and conduct an assessment of your working practice because the way in which you actually provide the services is crucial.
Whilst HMRC usually begin an enquiry by looking at the contractual terms, they will seek to clarify the terms directly with your end client. If your contract does not reflect your actual job role, any positive elements of the agreement would have very little bearing in an IR35 enquiry.
The new IR35 legislation changes follow similar rules regarding ‘Off-payroll workers’ in the public sector which came into force in 2017.
During the Autumn Budget 2018, it was announced that the ‘Off-payroll workers’ rules in the public sector would be extended to the private sector as of April 2020.
Taking steps to understand the contractor workforce from an IR35 perspective is imperative to help you build a process for managing the reform when it comes into effect in 2020. For both end clients and contractors, it is important to understand your rights and obligations under the new rules.
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