PLEASE NOTE: This article has been updated and replaced with: HMRC IR35 information and advice - a guide for contractors
Contractors who wish to learn more about IR35 and its implications for their limited company contracting business can find information HMRC’s website.
If a contractor’s contract is found to be inside IR35 and they are judged to be a disguised employee, the financial impact of IR35 is significant. The contractor will be liable for employee’s income tax and National Insurance Contributions (NICs) on the earnings from that contract, and could also be liable for interest and penalties.
Although the information and advice provided about IR35 on the HMRC website is mostly comprehensive and accurate, it should be followed with caution. That’s because the legislation relating to employment status and IR35 includes huge grey areas. So contractors are advised to seek the opinion of an IR35 and employment law expert on their contracts and not to rely entirely on HMRC’s interpretation; the advice supplied on its website should only be used as background information.
HMRC’s online IR35 resources – an overview
The IR35 ‘home page’ on HMRC’s website includes a basic background to the legislation, highlighting how “an individual could avoid being taxed as an employee on payments for services” by using an intermediary, which for most contractors mean a limited company or partnership.
Browsers are also directed to the pages about the Managed Services Company (MSC) Legislation, which contractors need to consider before deciding whether IR35 applies to their contract.
The links at the bottom of the IR35 ‘home page’ take contactors to a series of pages that provide short and informative descriptions of the following:
- When IR35 applies [More...]
- Who is responsible for deciding when IR35 applies [More...]
- Information specific to limited company and partnership contractors [More...]
- How a contractor can calculate the additional tax if their contract is found inside IR35 – this is called the ‘deemed payment’ – together with an Excel calculator. [More...]
On several of the web pages, HMRC invites contractors to submit their contract for an IR35 opinion, and HMRC provides details online of how such reviews are to be completed. It is highly recommended that contractors do not submit their contract to HMRC in this way, at least not until they have had it checked by an independent IR35 and employment law specialist. Even then, contracts should only be submitted to HMRC under certain circumstances.
HMRC’s tools for determining employment status
The publication ESM3000 provides contractors with details of HMRC’s internal guidance and information for tax agents and advisers, going into considerable detail about the processes used by inspectors when investigating the IR35 status of a contractor.
Although the information and advice provided about IR35 on the HMRC website is mostly comprehensive and accurate, it should be followed with caution
Because the crux of the IR35 legislation is to determine whether the contractor should be classed and treated as an employee for the purposes of paying tax, HMRC’s considerable online resources and tools for determining employment status can provide contractors with valuable tools and insights into determining employment status.
The employment status section of HMRC’s website contains an explanation of how workers can determine their employment status for tax purposes and introduces the tests of employment that HMRC’s inspectors actually use when investigating contractors.
There are also links to sections for employers. HMRC’s Employment Status Manual provides a comprehensive description of all the tests of employment, source legislation and case law relevant to employment status tests. This is kept current as the results of new cases become known.
Again, the guide invites employers to request an opinion from a local Status Inspector. However, contractors should avoid interacting with HMRC until they have an opinion from an independent IR35 expert, and only then under certain circumstances. Employers would be well advised to do likewise.
Employment Status Indicator (ESI) online interactive test
HMRC also provides an online Employment Status Indicator (ESI) designed, as its name suggests, to give contractors an instant opinion of employment status – whether they are an employee or self-employed.
Whilst the online tool is potentially a useful guide, the outcomes can be ambiguous, lack interpretation and some results are confusing because they do not include an explanation of the terms used. Again, best practice is for contractors to seek independent verification from an IR35 and employment law expert to determine the IR35 status of their contract.
HMRC does provide a wealth of information online for the contractor who has the time and motivation to work through it, and its website includes much of the guidance HMRC provides for its own compliance officers.
However, contractors should always ensure they check all contracts with an independent IR35 and employment law expert and, if possible, ensure that tax investigation insurance cover is in place, in case HMRC does take an interest in the contractor’s tax affairs.
PLEASE NOTE: This article has been updated and replaced with: HMRC IR35 information and advice - a guide for contractors