IR35 risk to employers
IR35 risks and considerations to be aware of when engaging an interim contractor
What are the IR35 risks of engaging an Interim Contractor?
IR35 (Intermediaries Legislation) is a set of tax rules in the UK that determines the tax status of individuals who work through an intermediary, such as a limited company, or recruitment agency for a client.
When engaging an interim limited company contractor, there are several IR35 risks and considerations to be aware of.
One of the main risks is that HM Revenue and Customs (HMRC) may determine that the contractor is a "disguised employee" rather than a genuine independent self-employed contractor. This could result in the contractor being classified as inside IR35, which means they should be treated as an employee for tax purposes.
Under IR35 legislation in the UK, whether a worker is considered employed or self-employed mainly depends on the following factors:
If the worker is fully integrated into the client's company, working alongside employees and following company rules, they might be seen as an employee.
HMRC provides an online tool called the Check Employment Status for Tax (CEST) tool. It's designed to help determine a worker's employment status for tax purposes.
While not mandatory, it can provide guidance and is widely used. The HMRC CEST report provides a quick initial assessment of the status of a contractor but should not be relied upon in isolation.
Given the complexity of IR35 rules, it's advisable to consult with a legal or tax professional with expertise in employment tax law. They can provide guidance specific to your situation.
Who is responsible for Tax Liability?
If a contractor is deemed to be inside IR35, the responsibility for deducting and paying taxes and National Insurance contributions falls on the end-client, not the contractor's limited company. This can lead to unexpected tax liabilities for the client. If they are engaged through an intermediary such as a recruitment agency, the responsibility falls to the intermediary. HMRC may still have recourse to the end client if taxes are not paid or the end client was the cause of the deemed employment relationship.
If an IR35 determination is made retrospectively for a previous engagement, the client may be liable for backdated taxes, including income tax and National Insurance contributions, as well as interest and penalties.
The financial impact of IR35 can be significant. Clients may need to account for employer's National Insurance contributions, holiday pay, and other employment-related costs for contractors inside IR35, which can increase the overall cost of engaging contractors.
The terms of the contract with the contractor's limited company are crucial in determining IR35 status. If the contract is found to be a sham, or if the working relationship differs substantially from the terms of the contract, it can lead to an inside IR35 determination. Examine the written contract between the worker and the client, but also consider the actual working practices. Sometimes, the contract may not accurately reflect how the relationship actually operates.
As of April 2021 (in the private sector) the responsibility for determining IR35 status shifted from the contractor's limited company to the end-client or intermediary (e.g. an agency). This places the onus on the client to make accurate determinations and conduct thorough assessments.
Penalties and Interest
Failing to comply with IR35 rules can result in penalties and interest charges from HMRC. These financial penalties can be substantial and add to the overall cost of non-compliance.
Clients found to be non-compliant with IR35 rules may face reputational damage, which can impact their relationships with contractors, customers, and partners.
Thinking of becoming a Contractor?
The role of an interim contractor has become increasingly attractive over the last two decades.
Before embarking on a career change, contractors need to consider a multitude of factors that can significantly impact their success. We explore these considerations in depth, providing a comprehensive guide to making an informed decision on becoming a contractor.
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