Your IR35 position
HMRC implemented new rules in April 2017. These changed how contractors were able to offset expenses against earnings to lower their tax exposure. Here, we summarise what this meant for people working in the public or private sector.
IR35 and the Public Sector
The IR35/public sector rules were enacted in the Finance Act 2017, which received Royal Assent on 27 April 2017. They outline how government departments will determine the IR35 position of clients. As we are all aware, the rule affected all contractors working in the public sector.
Its application means that all contractors’ earnings would be subject to income tax and national insurance. However, the contractor would not be entitled to other employment benefits (sick pay, employment right, annual leave pay) compared to a regular employee.
Where a contractor is working through an agency, the new rule states the agency must decide if a contractor falls within IR35. Clients or agencies will become liable if they deduct the incorrect amount of tax and national insurance from the contractor’s gross pay. Also, HMRC will charge an additional penalty if the contractor claimed un-allowable expenses.
The rules allow contractors to claim only a few work-related expenses. One of these is mileage, which the rules define as being only from a workplace to another temporary place of work, and not mileage between home and work. A contractor can claim other allowable expenses, such as essential work items, accommodation, and work phone calls through a self-assessment tax return. But these expenses must be ‘wholly, exclusively and necessarily’ in the course of your business.
IR35 and the Private Sector
Consultation is currently underway on extending the recent IR35 public sector changes to the private sector. We expect the government to roll this out very soon.
Before the extension of the new rules, contractors currently working in the private sector must be aware of the following points to avoid been caught by IR35:
Mutuality of Obligation
Does the employer continue to have the right to offer work, and is the employee obligated to accept and undertake all work provided? Then a mutuality of obligation exists between the contractor and the clients. Thus, the contract will be caught by IR35.
In an employment relationship, a superior has control over what work the employee does, and where and when they carry out the work. We know this as supervision, direction and control (SDC). If a contractor falls under SDC, then the contractor will be classified as employee, and not self-employed.
A true contractor has the right to appoint a substitute if he/she is not available to work. The ability to exercise this right to substitute will classify the contractor as self-employed, not as an employee.
The 24 Months Rule
Has the contractor engaged for work with a client for more than two years? Then the contractor will be classified as an employee, not self-employed. The contractor will not be able to claim tax relief on travel expenses from home to a temporary place of work.