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IR35 & IT Contracting - An Overview for IT Contractors

IR35 & IT Contracting – An Overview for IT Contractors

In the second in our series of blogs on IT Contracting we have provided an overview of the hottest topic for Contractors in the UK at present – IR35 (or Off-payroll working).

What is IR35?

It is a piece of legislation that enables HMRC to tax IT Contractors as they would PAYE employees.

It assumes that some contractors work through limited companies to avail of tax breaks and aims to bring these people back into the same tax band as other workers. It also assumes that employers are using contractors to avoid paying NIC, pension, AL, Sick Pay etc.

While it has been in place since 2000 it was only enforced in 2017 (when it was replaced with the “Off-Payroll Tax”) where it was deemed the responsibility of the employer to determine if the contract was “inside” or “outside” IR35. This only applied to government agencies.

As of April 2020 it will be the legal responsibility of the end-client, or fee-payer (which could be a recruitment agency or 3rd party MSP), to determine the nature of the role. Companies and contractors face serious sanctions if they fail to comply.

How is IR35 assessed?

Contractors can use “Tests of Employment” which include:

  1. Control: what degree of control does the client have over what, how, when and where the Contractor completes the work
  2. Substitution: is personal service by the Contractor required, or can the Contractor send a substitute in their place?
  3. Mutuality of obligation: mutuality of obligation is a concept where the employer is obliged to offer work, and the Contractor is obligated to accept it.

Basically, if the Contractor is to attend the same location every day to support BAU activities and cannot send a replacement in their stead should the need arise then he / she is most likely “inside” IR35.

There is an online test a Contractor can complete to assess this but some of the questions are ambiguous and in many cases the advice of a professional Tax Consultant, well-versed in IR35, is required.

You can take this test here.

What are the ramifications for IT Contractors?

While the motivations behind the legislation are honourable (and even egalitarian) the realities are (ironically) unfair to the affected contractor as they will be pulled into a tax bracket resulting in 25% lower income but will still not avail of Annual Leave or sick pay entitlements.

How can Ergo help?

Ergo are always seeking experienced IT Contractors and anyone concerned about the ramifications of IR35 should contact us to explore contract opportunities in IT Infrastructure, Cloud Consultancy, Project Management and Software Development. Email us to find out more.

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