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There’s lots of terminology surrounding IR35, but the most important to understand is the difference between contractors being In and Out of Scope of IR35.
The IR35 basics
It’s been over four years since IR35 was extended to the Private Sector, having already been in operation in the Public Sector for some time. The legislation is used by HMRC to verify the tax status of external contractors operating as a Limited Company.
Responsibility for making IR35 status determination statements sits with the End Client, the company that the contractor is delivering the services to. In order to make accurate determinations though it’s crucial that Hiring Managers fully understand IR35.
Linx, part of the NRL Group, provide expert IR35 support, handling the administrative burden for you and ensuring your staff are well-informed and educated about their decisions.
In Scope
Put simply, an In Scope IR35 decision means that the contractor’s working practices and engagement is considered, for tax purposes, as employment with the End Client and will therefore be subject to income tax and National Insurance Contributions (NIC) at source. This is also referred to as Inside IR35.
HMRC call this Disguised Employment. A Disguised Employee is a contracted worker who fills a position in a company and works under terms that would make them an employee but doesn’t pay the corresponding income tax and NIC that an employee would. HMRC has guidance on how they evaluate the IR35 status of a contractor, including utilising their CEST (Check Employment Status for Tax) Tool.
Out of Scope
Out of Scope indicates that the working arrangement between the contractor and End Client is not deemed as employment and the contractor is operating as a genuine Limited Company. As such IR35 does not apply and no income tax and NIC deductions are required. This is also referred to as Outside IR35.
It’s important to remember though that IR35 should be assessed for each individual assignment a contractor undertakes. This means that a contractor may have a mix of In Scope and Out of Scope assignments each year, and on those In Scope assignments the fee payer is accountable for paying income tax and NIC.
Umbrella companies explained
IR35 applies specifically to contractors who operate through their own Limited Company, often called a Personal Service Company (PSC). If a contractor works through an Umbrella company, they are classed as an employee of that umbrella company, and IR35 rules do not apply. This means their tax and National Insurance are deducted at source, similar to a traditional employee.
IR35 four years on
Since the legislation was introduced in April 2021, it’s become apparent that IR35 is an administrative headache for organisations, and the risk of getting a status determination wrong comes with potentially serious consequences.
To avoid the wide-reaching effects of non-compliant IR35 decisions, it is recommended that organisations partner with an independent and impartial IR35 specialist.
Linx, part of the NRL Group, provide expert IR35 support, taking away the administration for you and ensuring your staff are informed and educated on the decisions they make.
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