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The IR35 regime, previously applicable to off-payroll working in the contractor sector for public sector entities, has now been extended to private sector entities – with one exception.
Small business client hirers who engage a contractor through their personal service company are not affected.
The client hirer must determine whether proposed assignments are caught by IR35 or not. If so, the client hirer will be obliged to make deductions in respect of income tax and National Insurance contributions.
Which client hirers are affected?
Client hirers which do not meet two of the following criteria will be obliged to determine IR35 status for proposed assignments and make employment tax deductions:
Turnover is less than £10.2m
Balance sheet assets total £5.1m or more
There are 50 or more employees
At this time no statutory test exists to determine the status of contractors for the purposes of employment tax, but it is under consideration.
What contractors need to do now
Determine whether you are really employees of your own personal service companies or the client hirer.
Consider the financial risks and profit/loss.
Consider whether you have invested any capital into your business.
Consider your influence over the rate of pay for the assignment, and whether expenses are paid. Length and type of assignment may also be important.
Complete the check for employment status test otherwise known as CEST, which is a HMRC tool, and be expected to make full disclosure of all relevant circumstances before being able to rely upon a decision.
How contractors can negotiate IR35 status
If contractors want to keep their assignments outside IR35 they should be considering the structure of such assignments.
The assignments should make clear that the contractor is not be the subject, or control supervision or direction of client hirers. Include a right to substitute and refer to timelines, targets and phases of a particular assignment and linking payment to achieving such targets and milestones.
Where possible, contractors should provide their own equipment. The assignment should also build in degrees of flexibility. It is also important that contractors are not held out as an integral part of the client hirer.