IR35 was introduced in order to determine whether a contractor is genuine as opposed to being a ‘disguised’ employee. Contractors may not get benefits such as holiday and sick pay but they do have flexibility and control over their work alongside a level of tax efficiency when working through their limited company. This tax efficiency can be taken advantage of by some contractors who disguise themselves by working through a limited company when in fact they are an employee of that company.
There is not only a benefit for the contractor but also the employer when hiring people in this way. With their employees being contractors outside IR35 they won’t have to pay National Insurance contributions or give them employee benefits.
In most cases the contractor would become an employee if there was no limited or umbrella company involved. However there are often cases where this does not apply or the even the HMRC tool provided is incorrect. Furthermore there are different rules for those in the public sector compared to the private; contractors in the private sector have to determine themselves if they are inside IR35 or not and therefore pay any NICs and tax due, whereas in the public sector this is done by the hirer and whoever pays them has to report them to HMRC and deduct the tax and NICs.
There is a lot of criteria to check when seeing if you are IR35 compliant.
Supervision, direction, control – do you have complete say in how your work is completed? Often if you have set start and finish times for example, this can imply employment.
Substitution – could your work be completed by someone else? You are likely to be within IR35 if no one else could complete the contract for you and you have to do it yourself.
Mutuality of obligation – The case should be that when working a contract, you work project by project basis and you aren’t obligated to take the next one, however if they are obligated to offer you work and pay you and you are obligated to take it then it would be considered to be employment instead. It also should be considered if you could work for another client at the same time as a contractor should not be prohibited from doing so.
Furthermore, it is often argued that when the equipment used is not your own and is provided by the client then you are a disguised employee. Therefore this should be considered when in a contract and you are being told to use their equipment.