Contractors’ Questions: What does it mean to be inside IR35 or caught by IR35?
Contractor’s Question: Is being ‘inside’ IR35 the same as being ‘caught by’ IR35? And what do both of these mean, precisely and in practical terms if I run a limited company?
Expert’s Answer: In simple terms, being classed as either inside IR35 or caught by IR35 means that your contracting assignment has been assessed to be within the scope of the off-payroll working rules. As a result, any income received for the services you provide must be treated and taxed as if it were employment income.
The off-payroll working rules, also known as IR35, apply to any individual who provides their services through an intermediary organisation to an end-hiring organisation. This intermediary is typically a limited company owned and operated by the contractor. The industry tends to refer to this company as either a Personal Service Company, or PSC.
The off-payroll working rules are changing
With effect from April 6th 2021, the off-payroll working rules will be extended from a version of the framework created for the public sector in April 2017 to the private sector. Under this incoming framework, all but the smallest of companies that are end-hiring organisations will be required to make an assessment of their contractors’ employment status for tax. The end-hiring company’s decision will be issued in the form of a Status Determination Statement and broadly-speaking, will declare whether the assignment is either outside IR35, or inside IR35 (also known as caught by IR35).
If you’re a contractor, when an assignment is assessed as inside IR35, the company that pays your invoices (‘the fee-payer’) is now considered to be your deemed employer, and you by default have become their deemed employee. Some people refer to this situation as ‘disguised employment.’
What about Employment Rights?
It is important to be aware that being classed as inside IR35 does not confer employment rights, merely that your employment status for the purposes of tax is such that your deemed employer must now calculate and deduct tax and National Insurance contributions due against each payment they make to your limited company.
The net income received by your limited company is subsequently classed as fully taxed and would not be subject to any further deductions.
What if I don’t agree with the IR35 status decision?
The new rules include an obligation on the end-hiring organisation to provide a ‘client-led status disagreement process,’ allowing either the fee-payer or the contractor to initiate a formal process to challenge the status decision. Under that process, the decision must be reviewed and responded to within 45 days.
In this situation, the end-hiring organisation must either confirm their decision was correct, with evidence to support their decision, or provide a new Status Determination Status where a different outcome has been reached. Either way, ‘caught by IR35’ will mean ‘inside IR35’ (also known as the Intermediaries legislation or off-payroll rules applying), and ‘not caught by IR35’ will mean ‘outside IR35’ (also known as the Intermediaries legislation or off-payroll rules not applying). Good luck!
The expert was Chris Mattingly, chief executive of IR35 Navigator.