What is IR35?
IR35 is a ‘look through’ provision. It asks a hypothetical question:
“if the limited company (or other intermediate) did not exist, would the relationship between the end client and the worker be that of employer and employee?”
This means that you must ignore the sub-contractor’s company and any other intermediate, eg any agency involved, and just consider the relationship between you (as the client) and the person performing the work (the worker).
Any contract that the sub-contractor may have with an agency, if there is one, is irrelevant. It is only the terms under which they work for you that are considered.
Making the IR35 decision
Ask yourself – if this person had come to you as an individual and had asked to be paid gross (rather than through PAYE) would you be confident that they are genuinely self-employed?
This is a difficult decision to make and involves a multitude of factors such as:
- Control
- Personal service
- Mutuality of obligations
- Integration
- Economic reality
Each of these factors has many aspects and they very rarely all point towards the same conclusion. The decision must be made ‘on balance of probabilities’ which is often a very fine balance. It is not a decision that you should make yourself unless you are experienced in this field.
The following gives a few of our recommendations for the processes you should follow in order to ensure that you are compliant with the new rules.
Use the HMRC ‘Check Employment Status for Tax’ online tool to get an initial decision – https://www.gov.uk/guidance/check-employment-status-for-tax
If the outcome of the tool is that IR35 does not apply – Download a copy of the result and keep it safely – HMRC may need it as evidence in any future enquiry.
Issue a ‘Status Determination Statement’ to the worker and to the fee-payer (whoever will actually pay the worker’s company) – see point 4 below.
Make future payments under the contract as normal (without applying PAYE/NICs).
If the outcome of the tool is that IR35 does apply –If you disagree with its decision, contact us immediately and we will arrange for an independent review of the circumstances. It may be possible to argue that the online tool is wrong.
If you agree with its decision, issue a ‘Status Determination Statement’ to the worker and, unless you are paying the worker’s company, to the fee-payer (whoever will actually pay the worker’s company).
If you will be paying the worker’s company, apply PAYE/NICs to all future payments under the contract:
Enter the worker onto your payroll and deduct PAYE/NICs from the invoiced amount (exclusive of materials and VAT) as if the worker was your direct employee.
Pay over the net pay (plus materials and VAT) to the worker’s company.
At the end of the tax year, if the contract is still continuing, issue a P60 to the worker.
At the end of the contract, issue a P45 to the worker.
Issue a Status Determination Statement (SDS) to the worker and, unless you will be paying the worker’s company yourself, to the fee-payer (whoever will make payments to the worker’s company).There is no standard form for the SDS – a simple letter is sufficient.
It must state the decision – either that IR35 applies or that it does not, as appropriate
It must give reasons for the decision.
Please note that information provided is not tailored to specific situations and should not be used as an alternative to advice.
