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Understanding IR35 – Are you a disguised employee?

A growing number of professionals in the UK are transitioning from full-time employment to contracting – are they at risk of being misclassified? In this post, we take a look at disguised employment and what happens when your contract falls under the scope of IR35.

In 2009 TV presenter Christa Ackroyd took the advice of her employer BBC and set up a personal service company, changing her status from direct employee to that of a contractor. This was supposed to be a win-win arrangement for both parties with the BBC no longer needing to pay income tax and national insurance contributions for Christa, while she could enjoy greater flexibility and numerous tax breaks as a self-employed contractor.

Fast forward to 2018, when after a five-year dispute with HMRC over the nature of her contract, the tax authority is demanding £419,151 from Christa for the taxes she failed to pay. According to the tax authority, her contract fell under the scope of IR35, meaning she was not entitled to claim for the expenses as a contractor and should now pay up. She’s not alone in this. According to The Guardian, further BBC presenters could be facing backdated tax bills for disguised employment.

If you’re shaking your head thinking BBC is to blame here, consider the story of Gary Smith, a London-based engineer who brought a series of claims against Pimlico Plumbers. Although he worked for the company as an independent contractor, he argued he was entitled to employee rights due to the nature of his work and contract, which set minimum working hours and required him to use a company van. The employment tribunal agreed that he’s under the scope of IR35 and Pimlico Plumbers is now appealing to the Supreme Court against the decision.

What’s the “gig economy”?

The above cases are becoming all too common in the so-called “gig economy” – a phrase increasingly in use to mean a freelance economy based on people working a variety of small jobs to support themselves instead of working under permanent employment. On the one hand, it’s regarded as an arrangement offering flexibility like in the case of Christa Ackroyd, but it can become a form of exploitation with the lack of workplace protection in place, as suggested by the Pimlico Plumbers case. Either way, the gig economy is causing confusion to contractors with regards to where they stand when it comes to IR35.

When does a self-employed contractor become an employee?

IR35 is a legislative act enforced by HMRC, which applies to people that work for a client through an intermediary, such as a limited company. Essentially, HMRC wants to ensure that only genuine contractors benefit from the tax savings associated with this type of employment. If you go into a contract that identifies you as an employee of the client rather than an employee of your own limited company, the IR35 rules will then apply to you. If this is the case, you can expect to pay around 25% more in tax every year.

If you’re not sure whether you’re a contractor or an employee, consider the following points:

  • Who are you replacing? If your predecessor was an employee, it might mean you are one too.
  • Who is in control of your working conditions? If your contract is restrictive (e.g. defines working hours and holidays), IR35 might classify you as an employee. As a contractor, you should be in control.
  • Does your contract mention substitution? As a contractor, you can send a substitute to replace you if you’re unable to work. If your contract doesn’t include a clause on substitution, it might mean you’re an employee in disguise.
  • How are you paid? If you’re paid like all other employees at the end of each month, that can also be a sign that your contract falls inside IR35. Contractors tend to get paid at the end of their services or in instalments depending on the nature of their projects.

How to check if someone is self-employed

There are numerous IR35 evaluation tools and tests out there but relying on online IR35 advice is risky as failure to address the criteria properly will put you at risk of tax avoidance.

To make sure your contract passes IR35, the most sensible thing to do is to talk to accountants for contractors like Tax Agility before you set up your company and sign your contract. If you’re already providing services as self-employed but are under the impression you could be a disguised employee, we can also help you disperse or confirm your suspicions.

Contact one of our expert IR35 contractor accountants today on 020 8108 0090.