Understand your company's position and learn more about the options available
IR35: How this could affect you and your company
- Close Company With Debts
- No.1 For Liquidations
- Stop HMRC / Creditor Pressure
- 25,000+ Directors Helped
- Immediate Advice Available
- Insolvency Practitioners
Understanding the implications of IR35 for Company Directors
IR35 is also known as the Intermediaries Legislation, and originally came into force in April 2000 in an attempt by the government to prevent tax avoidance. It was based around the premise that independent contractors were able to avoid tax payments by working through an intermediary such as their own limited company, rather than as employees under the PAYE scheme.
Others worked via recruitment agencies or umbrella companies which deal with salary and tax payments. Employment status was deemed questionable by HMRC in some cases – where a lengthy contract had been agreed, for example, or when HMRC considered contractors as ‘disguised employees.’
Take Our Free 60 Second Test
Get an instant understanding of your:
- Debt and Asset Position
- Formal Insolvency Options
- Next steps
Plus much more ...Start The 60 Second Test
When an employee leaves work as an employee on a Friday and returns as a contractor on the Monday, carrying out the same work but no longer paying as much tax, this has become known as ‘disguised employment.’
The practice also benefits the former employer who no longer has to make Employers’ National Insurance contributions, or make available any employment benefits or rights to the contractor.
IR35 legislation aimed to identify disguised employees by introducing a test for employment status. If a contractor fails this test, they may fall ‘inside IR35’ and have to pay tax and National Insurance contributions as if they were an employee.
UK’s number one for director advice
We handle more corporate insolvency appointments than any other UK firm; demonstrating our commitment to helping directors and business owners in financial distress.
The team are available now - 0800 644 6080
Although HMRC have recently introduced a new tool to determine employment status, various aspects of a contract can indicate whether a contractor is employed or self-employed, including:
- Control: do you decide your own hours of work, and have control over how and when the work is carried out?
- Right of substitution: are you able to appoint another person to carry out the work if you are not available? Would you pay the substitute yourself, and cover any necessary training costs?
- Mutuality of obligation: is there an obligation for your client to offer you work, or for you to accept an offer of work if given?
- Employment rights: does the contract mention employment rights such as holiday or sick pay?
Other areas to consider include whether or not you provide the equipment to carry out the contract, for example computer or video editing hardware, the level of financial risk you take on, and the ‘length of engagement.’
To be viewed as self-employed, you should also avoid being seen as ‘part and parcel’ of your client’s firm. This means not entering the building using a security pass along with your client’s employees – even using the staff canteen could be held against you during an IR35 tax investigation.
To summarise, it is an overall view of your working practices that is tested for IR35. For example, if a contract states the personal service company can send another person in your place to carry out the work, this proves you have the ‘right of substitution’ and when all other factors are taken into account, it could mean that IR35 does not apply.
The government cite a combination of complex IR35 rules that are difficult to understand, and extensive non-compliance costing a purported £440 million every year¹ as the reasons for changing IR35 legislation in the 2017 Budget.
HMRC believe there are many cases where, if it wasn’t for the existence of a limited company, i.e. a personal service company that acts as intermediary, directors would be classed as an employee of their client.
Historically, the responsibility for deciding whether IR35 rules apply and for paying the correct amount of tax, lay with the contractor. In April this year, for those working in the public sector only, responsibility for applying IR35 rules shifts to the end-client.
Many grey areas exist when deciding whether IR35 applies, however. The new online Employment Status Service Tool provided by HMRC asks questions regarding various aspects of a contract, such as whether there is a right of substitution, and the public sector client has 31 days in which to determine a contractor’s employment status.
Can’t pay CBILS or Bounce Back Loan?
Don't worry - there are thousands of other company directors in the same position. If you are struggling to keep up with your Covid loan repayments, speak to a member of the Real Business Rescue team to discuss your options. It's Free & Confidential.
The team are available now - 0800 644 6080
This new process presents a danger to company directors running their own personal service company, as there may be a natural inclination by the public bodies to deem contractors as ‘within IR35’ in order to avoid making the wrong decision.
Apart from the significant loss of earnings for company directors caught by IR35, it is feared that, in turn, this could trigger an IR35 tax investigation by HMRC into previous contracts going back many years.
So what happens when a contractor is deemed to be ‘inside IR35’ and subject to the legislation? HMRC will look at each contract, deduct the tax that has been paid from what an employee would have paid through PAYE, and backdate this tax charge to the contractor.
This process can cause severe financial hardship in many cases, and easily result in insolvency for the personal service company involved. HMRC have the power to look back at contracts for at least six years to see if contractors/company directors fall within IR35 rules.
The potential for reduced income on a long-term basis, particularly for personal service companies whose clients are predominantly in the public sector, is worrying indeed. But if HMRC also apply IR35 to previous contracts already completed, this combination could cause a spiral into debt that is hard to escape.
Need to speak to someone?
If your company is struggling with unmanageable debts, squeezed cash flow, or an uncertain future, you are far from alone. We speak to company directors just like you every single day, and we are here to give you the help and advice you need.
Call our team today on 0800 644 6080
Even if you feel certain that IR35 does not apply to your own working situation, HMRC can still launch an investigation, causing disruption and expense. Intermediaries Legislation is an extremely complex area, and requires the input of an IR35 specialist to pre-empt tax investigations, and help you deal with them should you be targeted.
Real Business Rescue will help if you are unsure whether IR35 rules apply, or are facing scrutiny by HMRC. We can advise you on the new ‘off-payroll’ IR35 regulations, and obtain clarity on a particularly complex area of self-employment. Call our experts to arrange a same-day meeting at one of our offices.
Further Reading on IR35: How this could affect you and your company
Real Business Rescue are here to help
Still unsure whether liquidation is right for your company? Don't worry, the experts at Real Business Rescue are here to help. Our licensed insolvency practitioners will take the time to understand the problems your company is facing before recommending the best course of action going forward based on your own unique circumstances.
- UK’s Largest Liquidators
- 100+ Offices Nationwide
- 100% Confidential Advice
- Supported 25,000+ Directors
Looking for immediate support?
Complete the below to get in touch
We provide free confidential advice with absolutely no obligation.
Our expert and non-judgemental team are ready to assist directors and stakeholders today.