First introduced in 2000, IR35 is designed to reduce tax avoidance by contractors who HMRC believe to be “disguised employees” – people who work in a similar way to full-time employees but bill for their services via their limited companies to make their business as tax efficient as possible.
To increase compliance with the existing off-payroll working rules (IR35), medium and large organisations in all sectors of the economy will become responsible for assessing an individual’s employment status and determining whether the rules apply. Due to the Covid-19 outbreak, the government delayed its implementation until April 2021, resulting in a further 12 months to really understand its implication.
To show that there is no employment relationship, the contractor has to prove certain relationship criteria to determine whether they are 'inside' or 'outside' IR35. As a rule of thumb, IR35 won’t apply if the contract is for the services you provide instead of employment. It’s a good idea to keep the following three things in mind when deciding if your business falls inside or outside of IR35:
1.Mutuality of obligation
Working as a self-employed contractor means you can work in a project-by-project basis without any obligation to continue working for that client once the contract comes to an end. Equally, clients are under no obligation to continue offering you contracts once the project you’re working on is complete. If a client is obliged to offer you paid work and you’re obliged to take it, this is an example of a contract of employment, meaning you fall within IR35. Also, if a contract states that you can’t take on other clients while working for them, this also places you within IR35.
If a contract states that the client wants you, and only you, to see a job through from start to finish, then this working relationship will fall within IR35 rules. For a contract to fall outside of IR35 it should highlight that the substitute workers you put forward can complete the contract work on your behalf instead.
3.Supervision, direction, control
Contractors must have control over how they complete their work for a contract to fall outside of IR35. If a contract sets working patterns and the client provides excessive input over how work is completed, then it’s likely that this will fall under employment rather than contract work. Keep in mind that if you’re also completing tasks for a client in addition to the contract services you’re already providing, the contract is likely to fall within IR35 too.
Useful link for Contractors - HMRC Factsheet