When is a contractor still responsible for IR35?

We’ll be honest, if you haven’t heard about IR35 by now, we sort of envy you. You’ve obviously been living the quiet life on a deserted island somewhere without COVID, Storm Arwen, or Elf on the Shelf and are probably feeling quite peaceful and relaxed. But assuming you need a quick refresher, here’s a quick overview of IR35 for you.

IR35 is the legislation put in place to help HMRC root out ‘disguised employees’ – people reaping the tax benefits of being a limited company contractor while still remaining an employee.

If you are ‘outside’ IR35 then you’re considered genuinely self-employed and pay tax and National Insurance contributions via self-assessment. However, if you are ‘inside’ IR35 then it means you are considered, to all intents and purposes, an employee for tax purposes and, therefore, pay tax and NICs through PAYE at the same rate as an employee (although without any of the perks).

The reforms earlier this year kept that the same but made changes to who holds the responsibility for determination, and who holds the tax liability.

Who is responsible for IR35?

Up until April this year, private sector contractors (the reforms have been in place in the public sector for quite some time) were responsible for declaring their own IR35 status for each contract they are engaged in. The contractor was also responsible for the payment of any taxes and NICs owed.

This changed with the reforms and it largely became the responsibility of the end client to issue a Status Determination Statement (SDS) while the fee payer (usually the recruiter or end client) holds the tax liability. However, just to confuse matters a bit more, there are some exceptions to the rules that contractors need to get their heads around.

These generally relate to the size of the client’s company and/or where the client is based.

What if my client is a small business?

So, one important fact to remember about the new IR35 legislation is that it only applies in cases where the end client is a medium or large business as per Companies Act 2006. So, if your client is a medium or large business, it is – as outlined above – their responsibility to issue your SDS, and your fee payer holds the tax liability.

But, if your client is a small business then nothing has changed. In this case, you are the person who determines your IR35 status and you hold the tax liability.

But what does HMRC count as a small business? Mercifully, this is straightforward enough and easy to ascertain from a quick chat with your client.

To be considered a small business, the client’s company must satisfy at least two of the following criteria:

• An annual turnover of no more than £10.2 million;
• No more than £5.1 million on their balance sheet;
• No more than an average of 50 employees during the tax year.

It’s also worth bearing in mind that if your client’s organisation is, by definition, a small business, but is part of a wider group of companies, the parent organisation must also be defined as a small business. If not, then your client is a medium or large business.

You should also note that if you have multiple clients at any one time, you could be determining your own IR35 status for one (small) client, but receiving an SDS from a second (medium or large) client.

What if my client is based overseas?

If your end client is not based in the UK then it might be the case that you are responsible for your own IR35 status determination, but it depends on how your client’s business is set up.

If your end client is not based in the UK but has a Permanent Establishment in the UK – even a tiny one – then your client’s offshore branch would be responsible for determining your IR35 status and issuing your SDS. Your fee payer would remain liable for the payment of taxes and NICs. If your client is the fee payer, then your client’s UK branch would be liable for taxes and NICs.

However, if your end client is overseas and has no connection to the UK whatsoever, then all responsibility for determining your IR35 status reverts to you, as does the liability for tax and NICs.

What if I, the contractor, am working overseas?

This depends on whether or not you’re classed as a non-UK resident. HMRC guidance ESM10025 states that: “A client does not need to consider whether Chapter 10/Part 2 rules apply where there is no liability to tax and NICs in the UK”, and “a worker who is not UK-resident and is performing work outside the UK is unlikely to fall within the charge to UK tax or NICs. If the worker is not chargeable to UK tax or NICs, then the off-payroll working rules will not apply.”

Put simply, if you are working abroad and qualify as a non-UK resident through the Statutory Residence Test, you would not have to consider IR35 at all.

How do I work out what my IR35 status is?

If determining your IR35 status does indeed fall to you as the contractor, you may want a bit of help to make sure you make the right decision.

That’s where the Kingsbridge IR35 Status Tool can help. For just £50 plus VAT, it asks you some carefully thought-out yes/no questions about your contract and working practices to issue you with an instant, accurate IR35 status determination. It even includes a detailed report so that you can see the strengths and weaknesses of your case as HMRC might view them.

And if your determination is borderline, it gets passed to one of our in-house IR35 specialists so that they can perform a manual review to give you complete confidence. You can check the tool out here.