IR35 Ask an Expert – your questions answered Part 2


In Part 2 of our blog series, we quiz our experts on a few more of the most common questions around IR35, properly known as the intermediaries legislation.
Specifically we take a look at who exactly is (and isn’t) affected by the legislation and the methods of determining IR35 status, including HMRC’s new ESS tool.

Does IR35 affect sole traders?
IR35 is not a consideration for sole traders. The legislation applies specifically to limited companies (and partnerships).

Does IR35 affect Umbrella companies?
As above only limited companies are in scope of IR35. If you are an umbrella worker you are an employee and you are already being taxed under normal PAYE circumstances.

What are the rules for IR35 in the NHS?
According to reports, NHS Improvement informed all its locum and agency staff that they will be subject to PAYE and on payroll from early April 2017.
This is perhaps not surprising, particularly for medical / clinical roles where locums are likely to be working under the supervision of the Trust’s medical director.
However NHS Improvement subsequently published a more detailed view of roles which are definitely inside IR35 and those which “should” be inside.

What are the rules for IR35 in the private sector?
For private sector contracts it is the responsibility of the limited company director to determine their status under IR35 and operate the appropriate deemed payments on their income if they are operating inside IR35.

The recent changes to IR35 apply to public sector contracts only. While there are currently no immediate plans to roll out these changes in the private sector, there has been widespread speculation that this will be a logical next step for HMRC, given the opportunity for further tax revenue.

What is the test for IR35?
The tests which determine IR35 status are complex and have evolved over decades of UK case law. In short, three key principles are applied, as well as several other factors.

  • Mutuality of obligation: Is the agency or end client obliged to offer work and is the worker obliged to take it?
  • Substitution: Is personal service by the worker required, or can the worker send a substitute?
  • Control: What degree of control does the client have over what, how, when and where the worker completes the work?

In the case of an IR35 investigation, HMRC will look at both the written contract between your limited company and agency (if any) and end client and how it mirrors your actual working practices. They will then decide whether the relationship is one of employment (inside or “caught” by IR35) or business to business services (outside or “not caught” by IR35).

What is HMRC’s digital IR35 tool?
HMRC Employment Status Service (ESS) is a digital tool to assist workers, or anyone taking them on, to assess their status under IR35.
Using a series of questions, the ESS tool makes a determination as to whether the worker is employed or self-employed for tax, National Insurance or VAT purposes.
Example questions include: “Can you provide a substitute and if so, have you ever supplied one?” and “How much control do you have over the work you perform?”

It should be noted that use of the tool is not mandatory.

Got a question? Tell us and we’ll ensure it is covered in the next Ask an Expert post