IR35 helps HMRC tackle tax avoidance through “off-payroll working”
Off payroll working is also termed ‘disguised’ employment.
IR35 aims to ensure subbies who work like employees pay broadly the same tax and National Insurance as employees on payroll, regardless of the structure they work through.
IR35 affects all contractors who do not meet HMRC’s definition of ‘self-employment’.
The first and most important point is to establish whether your subbies are ’employed’ or ‘self-employed’ under HMRC’s terms.
IR35 Checklist
- Supervision, direction, control – this relates to how much say you have over how your subbies complete your work. For example, if your subbies have to work at certain times, this implies employment
- For a contract to fall outside IR35, contractors should have freedom over how they complete their work
- Substitution – could your subbie bring someone else in to complete the contract, or do they need to do the work themselves? If they can’t send someone else, this implies employment
- For a contract to fall outside IR35, contractors should be able to send a substitute to complete the work instead
- Mutuality of obligation (MOO) – is there an obligation for you to offer work, and do the subbies have to accept it? This is called mutuality of obligation, and if an element of it exists, this implies employment
- For a contract to fall outside IR35, you are not obliged to offer work to contractors and they are not obliged to take it. They should have the freedom to work for whom they want to
There are other factors to consider when working out IR35 status:
If equipment is provided by the you, and subbies don’t use their own, they can be classed as a disguised employee.
Subbies must be covered by their own professional indemnity insurance, otherwise you would be responsible for any errors made during the contract.
If your subbies become so ingrained that they become part of your company’s structure, with people reporting to them for example, this points to employment rather than self-employment.
Self employed subbies can work for multiple clients so if they’re working exclusively for you, this can be classed as disguised employment.
Once all this has been taken into account, if the worker is effectively a pseudo employee, then that worker falls within IR35.
IR35 Status Determination Statement
The Status Determination Statement (SDS) declares that an IR35 assessment has been carried out on a contractor and declares their deemed employment status. The SDS also provides reasons for reaching this conclusion.
All of the factors listed above – especially control, the right of substitution and mutuality of obligations – are considered when completing an IR35 assessment.
Penalties for subbies caught inside IR35
Under current rules, contractors caught inside IR35 with a wrongly designated employment status will have to pay back:
- A penalty of 30% of unpaid tax if HMRC deems a contractor was careless about their employment status but did not know it was inaccurate
- A penalty of 70% of unpaid tax if HMRC finds that the contractor knew they were within IR35 and yet chose not to act
- 100% of unpaid tax if HMRC finds that a contractor actively tried to conceal their IR35 status and underpayment of tax
How do we check your Subbies’ employment status?
When a subcontractor registers with Sovereign Plus we:
- Request a UTR number and verify each subcontractor with HMRC to determine their tax rate
- Run the Check Employment Status for Tax (CEST) test questionnaire
- Produce a robust contract confirming self-employment status for each subcontractor to sign
- Provide Status Determination Statements for all subcontractors on your behalf
- Manage any challenges to an SDS
“Sovereign Plus gives you peace of mind when engaging with subcontractors. We undertake all relevant employment status checks, keeping you protected from an HMRC enquiry.”
David Jenkins – Managing Dirctor