IR35 is the tax legislation governing workers and employers who would otherwise be classed as employees and an employer. IR35 covers those who do not work as part of a company’s payroll, but who work through an intermediary such as a limited company. IR35 is also defined by terms such as ‘disguised employment,’ ‘false self-employment’ and ‘off-payroll’ working,’ which all refer to workers that are not paid through the hirer company’s own PAYE regime (as an employee].
We also take care of the necessary administrative and contractual responsibilities for workers, allowing workers to focus on providing the best services to their end client. For recruiters and employers, we ensure time-sheets are properly submitted and managed and that invoicing is taken care of.
To find out more about our umbrella company services, how we can help you and your workers stay IR35 compliant and how we can save you money, get in touch.
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IR35 Rules Explained
IR35 is UK legislation in place to ensure that tax is paid by workers who provide their services to clients or companies through an intermediary (for example through an umbrella or a limited company) but who would otherwise be considered a member of staff if the intermediary was not involved.
These types of off-payroll workers are paid through their own intermediary, which means that the way in which they pay National Insurance contributions (NICs) as well as Income Tax works in a different manner to how it would were they employed directly by the client.
IR35 Rules and Legislation are often pertinent to Gig Economy workers, contractors and freelance workers, all of whom tend to be responsible for their own tax returns, NICs and expenses. For these workers, there are times in which the worker may ultimately become fully employed by the employer, whilst there are many other cases in which the service provider or contractor can utilise umbrella company services to remain IR35 compliant, keeping the worker off the payroll.
What is IR35 Legislation?
IR35 was implemented by the UK government in 2000 and is used to identify ‘disguised employees’ and tax them in accordance with the rate at which they should be paying tax, were they directly employed by their client in respect of Income Tax and National Insurance.
Prior to the implementation of IR35, self-employed workers would be able to provide their services as a limited company, and be able to take a considerable large percentage of their earnings, claimed as dividends.
This meant that employees were able to save on NICs and other tax obligations and there was no regulation in place for HMRC to change or challenge the relationship in any way. This meant that people could minimise their tax almost unhindered.
For a person could potentially leave their employer on a Friday, set up a limited company over the weekend and then return to the same employer, doing the very same job they were previously employed for, but they would now be working as a limited company with potentially fewer tax obligations.
How does Transparent Umbrella Company help?
The Transparent Umbrella Company safeguards workers, agencies and hiring end clients in several simple but very important ways:
Tax Assurance and Efficiency – We provide tax surety to all parties that no tax avoidance is taking place; explicitly or unintentionally. We also enable participants (with appropriate data and privacy permissions) to view taxes as they are paid, in real time. This avoids the need for expensive retrospective checks by agencies and end clients.
Added Protection – All Transparent Umbrella workers are engaged using an overarching employment contract, meaning that individuals can never be categorised as disguised or hidden employees of the client (hirer.) There is a separate service agreement for supply of service between umbrella and agency.
More Efficient – Transparent Umbrella uses its own technology platform to exchange data with other parts of the supply chain to improve efficiencies around the speed and transparency of payments, so participants can be sure that there is no ‘hidden rewards’ being shared.
Clearer Obligations – As employer, we assist in the collection and reporting of employee and employer taxes and contributions, as well as addressing other obligations under the Agency Workers Regulations and the Working Time Directive.
To find out more about our umbrella company services, how we can help workers and recruiters stay IR35 compliant and save time and money, get in touch.
What is Disguised Employment?
Disguised employment refers to the status of contract or freelance workers who works in a permanent role for an employer, but who does not pay the necessary taxes. These people are referred to as ‘disguised employees.’ IR35 is applied on a contract by contract basis and is used to see if a worker is a disguised employee or genuinely in business on a different basis, such as a consultant.
If a contractor is deemed to be inside IR35 Legislation for a contract and is determined by HMRC to be a disguised employee, it is often the case that the employee in question will be liable to pay income tax and national insurance contributions on a traditional ‘employed basis.’
Tests for Employment and IR35 Status
The tests that are often carried out in order to determine whether or not a contractor is genuinely in business on their own accord as a disguised employee is via a few determinant assessments:
Mutuality of Obligation (MOO) – A contractor passes this test if they expect the client to give them work, and this client expects them to complete it.
Substantiation – A contractor passes the substantiation test if they are not able to provide a substitute for or provide a replacement in order to carry out the tasks for the client on their behalf. For example, if a worker has a role that an otherwise equivalent contractor could not carry out, they have not passed this test.
CEST – HMRC has deployed its own test tool known an “Check Employment Status for Tax”, otherwise known as ‘CEST’
Control – A contractor passes the control test if they are told where, how and when where the tasks need to be allocated as part of their contract
Who Needs to Be Aware of IR35 Rules?
To provide clarity in regards to who needs to be aware of off-payroll working rules and the rules of IR35, it includes you if:
- You are the person responsible for hiring workers [i.e. a recruitment agency] who subsequently provide their services via an intermediary to clients in the public sector
- The service you provide to a client is through your own intermediary
- The work and employment you have is channelled through a partnership, another individual or a personal service company (otherwise known as a PSC)
When IR35 Rules Do Not Apply
There are situations where off-payroll working regulations may not be applicable. For example, if the umbrella company, agency or other third party supplies you as the contractor directly to a client, employing you directly then they will make the necessary tax and National Insurance deductions as the employer.
If a contractor is engaged by the umbrella company, agency or third party via a worker’s intermediary, it may then by the case that business taxes apply (such as Corporation Tax.)