At the wake of the pandemic, Covid-19, the economy of United Kingdom, not to mention the entire world, is steadily declining. The prominent business owners and other influential personalities of the nation are requesting the administration to take the matter of IR35 in their hands and come up with a remedy. Such a measure would help the country to survive during the pandemic and revive the economy nonetheless gradually.
In this following news blog, the topic of discussion is about the conflicting systems of IR35 and Off-payroll. Further, a few aspects of Her Majesty's Revenue and Customs (HMRC) and the effect such systems have cast over the Umbrella company would also be discussed.
What is IR35?
IR35 stands for the "Intermediaries Legislation". This rule surfaced in April 2000, and this regulation mainly applies to contractors, who are engaged through an intermediary organisation like a limited company or partnership.
As per HMRC, contractors who are working as disguised employees, meaning that in the absence of the intermediary, the relation between their client and them will be that of an employer and employee should pay the same amount of taxes and National Insurance Contributions (NIC) as any other employee. Further, the administration enforced the rules of IR35 to ensure that contractors, should determine their status of employment, and are subjected to pay required taxation if caught inside IR35.
What is Off-payroll?
In simple words, the off-payroll means that a worker is getting paid through other mediums, instead of availing a salary like a regular employee. Unlike IR35, under off-payroll the end client is responsible for determining the IR35 status. If a client recognises a contractors as an employee, then they should be paid after deduction of Taxes and NIC.
Difference between IR35 and off-payroll
After understanding what is IR35 and what is off-payroll, it becomes easier to differentiate between the two. The essential difference is as follows -
Off-payroll requires the end-client to assess the status of the worker and the fee payer, which is usually the agency takes the responsibility of tax risk. In IR35, the worker is responsible for assessing their status and assume the tax risk.
The other main difference is that under IR35, the contractor bears the cost of employers NIC. Whereas under the Off-Payroll rules, the employment costs of employers NIC and Apprenticeship Levy is to be paid on top of the workers agreed rate by the fee-payer.
Ready Mixed Concrete Case: 3 tests – Substitution, Control and Mutual of Obligation
Ready Mixed Concentrate Case is the landmark labour law case that is used to determine the status of a worker. The above-stated case birthed a few crucial components, which should be considered by a worker. National insurance 1968 2 QB497 and another company known as ready mixed concrete south east ltd have defined contract of service instead of contract of service. According to the case, a relationship will be that of an employer and employee if the following components are present -
- Substitution - The worker is required to provide the service personally and cannot send a substitute.
- Control – The worker, expressly agrees or it is implied, that in the performance of that service they will be subject to the other’s control to a sufficient degree to make that other master.
- Mutual Obligation – There is an obligation for the worker to perform the contract and an obligation from hirer to provide work to the worker.
- Other: The other provisions of the contract are consistent with its being a contract of service.
How to Assess IR35 status – CEST, risks of incorrect assessments
A contractor should verify their employment status to understand the relationship they share with their client. This, in turn, would reflect on the amount of tax they pay. To ensure your employment status, you can use HMRC’s CEST tool. The full form of CEST is "Check Employment Status for Tax". Please note HMRC’s CEST has been heavily criticised and cannot be relied to give accurate results, especially due to the view taken by HMRC on mutuality of obligation. It is therefore recommended you get in touch with DNS Accountants for IR35 review.
The following should also verify the status of their workers-
- You are an agency providing workers to an intermediary association.
- You are hiring a "worker" directly.
- There has been a change in the contract.
HMRC enquires about one's payment of taxes to ensure whether the citizen has returned their taxes accurately or not. The HMRC holds a right to conduct such enquiries, and if an individual is found non-compliant, taxes and penalty could apply. If a contractor is caught under IR35, they could be worse-off by 25% of the income generated.
Can I use Umbrella Company if Outside IR35?
Yes, an employee can use an Umbrella company even if they are outside IR35, but this wouldn’t be a tax efficient way of operating. Contractors who are inside IR35, should operate through an Umbrella Company.
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