IR35 is a piece of government legislation created to help distinguish genuinely independent contractors from those who are essentially disguised employees.

IR35 was introduced by HMRC in 2000 to tackle the problem of contractors working full time via their PSC to gain tax advantages.

Every contractor’s IR35 ‘status’ effectively determines their tax position with HMRC. End hirers are required to scrutinise the roles and responsibilities of every contractor they hire according to the rules laid down within IR35.

The outcome of an SDS completed by the hirer will determine whether a contractor is genuinely independent and bearing the risk of self-employment – and therefore entitled to tax advantages – or if they are essentially performing the role of a PAYE employee. If a contractor’s relationship with their end hirer falls inside IR35, they will be taxed according to PAYE. If it falls outside, they will be taxed as a Limited Company, where they can primarily withdraw funds as dividends.

From April 2021, Private Sector hirers are responsible for assessing a contractor’s IR35 status. This responsibility previously sat with the Contractor.

When IR35 was first introduced in 2000, contractor’s themselves were responsible for self-assessment. The regulations were changed in 2017, to make Public Sector hirers responsible for assessing contractors instead. In April 2021 Private Sectors hirers will join them, providing every contractor with a Status Determination Statement (SDS) that clearly states their employment status under IR35.

What IR35 Changes were made in the Private Sector in 2021?

A contractor’s IR35 status effectively determines their tax position with HMRC. It is assessed by the hirer completing an Status Determination Statement (SDS) on the contractor’s behalf.

IR35 is legislation used by HMRC to work out whether a contractor should be taxed as an employee according to PAYE rules, or on a limited company basis, withdrawing funds primarily as dividends. A contractor’s IR35 status therefore determines which one applies to them.

The system used to establish a contractor’s status is called an SDS. This assessment uses three key factors in working a status out: supervision, direction and control, right of substitution and mutuality of obligation.

As a general rule, the greater the supervision, direction and control imposed by an end hirer, the more likely it is that the contractor’s status will fall inside IR35 and they will be taxed under PAYE.

It is the end hirers responsibility to assess IR35 status, irrespective of whether it’s a public or private sector contract. They need to complete an employment assessment checklist which takes into consideration the key IR35 indicators.

What is an IR35 Status and How is it Assessed?

If a contract is inside IR35, you have to pay income tax and National Insurance Contributions just like employees do. To be outside IR35, your contract must reflect you and your client's actual working practices, so you aren’t caught out by HMRC.

Your contract is likely to include details of the services you’ll be providing, and when and where you’ll be working. But it won’t include demands from the client’s point of view, such as performance monitoring and appraisals.

If you offer services, rather than a contract for a service, then you're likely to fall outside of IR35 as you could send someone to do the work in your place, for example.

Your IR35 status has different implications for the tax you pay.

· are classed as an employee for tax purposes

· need to pay income tax and National Insurance Contributions

· pay this tax by making a ‘deemed payment’ at the end of the tax year

Working out your deemed payment can be complex, so it’s best to speak to your accountant to make sure you get it right.

But if you’re a public sector contractor, your fee payer will work out and pay your tax and NICs on your behalf (this applies to those in the private sector from April 2021 too).

· are self-employed and operate as a proper business

· are responsible for your business’s taxes

· can pay yourself in a tax-efficient way

If you’re outside IR35 you’ll be paid your fee and will be responsible for managing your business’s taxes as normal.

An SDS or status determination statement, is a document that summarises an end hirers IR35 assessment for a specific contractor. It determines whether they fall inside or outside IR35, and therefore how they will be paid and taxed.

If you work as a contractor then any end hirers you work for are responsible for assessing you for IR35 and providing you with an SDS (status determination statement).

Your SDS is basically a summary explaining how they reached their decision about your IR35 status. It will confirm whether you are captured or not, and how you will be paid for the work you complete for them. Every new contract – or change that is made to a current contract – will require a new SDS.

There is no set template for an SDS, but end hirers are obliged to include whether or not a worker would legally be an employee if they were directly engaged by them. They must provide clear reasons for their conclusion and show that they have taken reasonable care in making the decision. As part of this reasonable care, they are entitled to use the support of Brookson Legal to help them gather evidence and clarify their understanding.

If you disagree with an end hirers IR35 assessment and wish to contest the SDS, you can request an end hirers review by Brookson Legal yourself. If you challenge the decision, the end hirer must respond within 45 days – either by confirming their current assessment or issuing you with a new SDS with the revised decision.

What is an SDS? – (Status Determination Statement)

It is the end hirers responsibility to determine a contractor’s IR35 status and provide them with an SDS. This applies to both Public and Private Sectors.

Currently, the law states that it is only up to the public sector end hirer to assess their contractors for IR35 and determine their status.

Historically, private sector organisations could leave it to the individual contractor. However, these rules have now changed. So from April 2021 even if you are a contractor and used to self-assess your own IR35 status, you no longer have this responsibility. The legal responsibility for assessing IR35 – public or private – falls with your end hirer.

Who is Responsible for Determining a Contractor’s IR35 Status?

Yes. All contractors are entitled to challenge an end hirers IR35 Status determination. To do this, they need to undertake an independent review and put forward additional supporting evidence.

As part of the IR35 assessment process all end hirers are obliged to offer contractors a clear process for challenging end determinations. This challenge process can be initiated either by the Fee Payer or the contractor themselves. Once started, the end hirer has 45 days to inform the worker or Fee Payer whether the decision can be overturned or not. If it can they need to provide a new SDS with supporting information in that timeframe.

If the end hirer fails to provide a response to either the fee payer or worker within 45 days, they will become legally liable for calculating and making the deductions for employment taxes from the fee payer to the end hirer. It is therefore important that this process is managed effectively by the end hirer.

This is a question that can only be answered by your end hirer. It is their responsibility to undertake an assessment that clearly tells you and HMRC whether your working relationship with them falls inside or outside of IR35.

Whether you are inside or outside IR35 is an important thing to understand. It impacts the way you earn and pay tax, so there are legal implications for both you and your end hirer. The assessment process is designed to safeguard HMRC from contractors essentially getting the tax benefits of being a limited company whilst undertaking a full-time role with little or no risk.

By completing an SDS, your end hirer will generally look at how much supervision you need, how much direction you take and how much control you have whilst doing the work – amongst other indicators of employment or self-employment.

Generally, the less freedom you have and the more instructions you are given in your work, the more likely it is that you fall inside IR35 and will need to be paid and taxed as an employee with PAYE and NIC.

Being inside IR35 impacts the way you are taxed, since HMRC will deem that you should follow PAYE rules not limited company rules. You may therefore find your after tax earnings are lower in comparison.

If you are a contractor and your end hirer decides that you fall inside IR35, then you will receive your payments from them into your PSC in the form of a ‘deemed payment’. This means that the fee payer (usually a recruitment agency but sometimes an end hirer) will deduct your income tax and national insurance directly from these payments through their own payroll system, before they reach your bank account. Alternatively you can be taxed on a PAYE basis via an umbrella solution.

Being taxed on a PAYE basis isn’t as tax efficient as taking a small salary and dividends from your company, so you will pay more tax – whether you do it through your own limited company or through an umbrella company. However, the real impact on your finances depends on your personal circumstances.

If you are working via your limited company on a captured assignment inside IR35, the fee payer will deduct your National Insurance contributions and income tax before making the payment into your company bank account. You can then withdraw the payment as a dividend – without worrying about any more tax implications.

If you are registered for VAT, you will continue to receive the VAT element of your invoice which you will pay directly over to HMRC. Whilst your tax will be taken care of, you still need to make sure there are funds in the company account to cover running costs such as accountancy fees and insurance.

What are the financial implications of being inside IR35?

You can keep hold of your crucial temporary workers and continue to hire contractors when your projects need them the most.

Greystone have partnered with Kingsbridge who have created the only solution that combines the best technology with expert support.

Our relationship with Kingsbridge means that you not only have access to the highest quality talent, but you can be assured that you have a compliant workforce, mitigate your tax liability, save on unnecessary costs and remove any disruption to your projects.

With our solution, we take away your risk & responsibility of ensuring compliance and become the ‘fee payer’. We will provide you with access to our online IR35 tool in addition to:

· Individual assessments (including SDS)

· Downloadable reports and recommendations

· Integrated status disagreement process

For more information on how Greystone can help, contact Phil Hodgson.

How can Greystone help your business with IR35

You can gain a competitive advantage over other contractors by becoming a Greystone member and taking advantage of our relationship with Kingsbridge. We ensure the process of becoming compliant is made simple and transacted smoothly, keeping you informed along the way. When you secure a role with a Greystone client, we will cover the costs of your Knightsbridge insurance; which will secure you against any potential IR35 dispute and cover your full legal expenses, including:

How can Greystone help contractors with IR35

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