What exactly is IR35? We’ve pulled together everything HR professionals need to know about IR35, providing an overview of the legislation and the difference between contractors working inside and outside IR35. Read on as we simplify the jargon, and let you know how you can assess IR35 status.

What is IR35?
IR35 is a tax legislation that was put in place to uncover ‘disguised employees’ to prevent personal service companies (PSCs), often referred to as limited company contractors, from taking advantage of lower tax rates while effectively working as a permanent employee of the company. The change in legislation took place in the public sector back in 2017, with the private sector reforms occurring in April 2021.

The reforms saw a shift in responsibility for declaring a contractor’s employment status, as well as where the tax liability rests, from the contractor to the end client. The client, according to HMRC, is the “organisation who will be receiving the services of a contractor”. This organisation is now liable for assessing their IR35 status and must issue a Status Determination Statement (SDS), which will declare whether the contractor is working inside or outside IR35 for that particular contract. The only exceptions to this are if the organisation is a small business, or if the business is based overseas and has no link to the UK.

In addition, if your company pays the contractor, then it is their responsibility to deduct the required tax and national insurance payments. If the contractor is paid by a separate party, for example, a recruitment agency, then the liability would shift to them (once they have received the SDS from the organisation receiving the services).

What is the difference between inside IR35 and outside IR35?
Quite simply, if a contractor is assessed as outside IR35 then there is little that needs to change. The contractor will continue to be paid in the usual fashion, and they will deal with their own tax requirements via Self-Assessment. In contrast, if they are assessed as ‘inside’ IR35, then they must be taxed at source through PAYE, with the required tax and national insurance payments deducted.

What if my company doesn’t fulfil their IR35 requirements?
Once you have ascertained the IR35 requirements for your company, you should ensure that these are being met. The reforms came into play 6 months ago, and at Kingsbridge, we have already heard reports of HMRC carrying out IR35 compliance checks, so it is imperative that you get a process in place straight away, if you haven’t done so already. If you do not fulfil your requirements, this could leave you liable for any underpayments. It’s worth noting that HMRC has promised a “soft landing” approach for the first year of the reforms, which means that there will be no fines or penalties for businesses who make a status determination that is found to be incorrect, but they must still show that they took the “reasonable care” that the legislation demands – and the tax liabilities will still apply. This means that organisations can’t rely on just making blanket decisions, or asking your contractors to assess themselves.

If you are a HR professional working for a recruitment company, both the end clients and contractors may have already reached out to you for support. You may wish to consider having a process in place to provide guidance and also check status determinations.

How can HR professionals assess IR35 status?
There are many tools available to assess a contractor’s IR35 status, we have listed the main options below.

Check Employment Status for Tax (CEST).
CEST is HMRC’s own tool and is a popular first port of call for anyone looking to start the process of assessing contractor status.

Pros: It’s free to use, and you can progress through the questions fairly quickly.

Cons: It generates lots of indeterminate results, with the most recent report from HMRC revealing over 20% of uses generated an indeterminate result. If and when this happens, you’re instructed to call HMRC.

Verdict: We don’t rate this tool and wouldn’t recommend it to HR professionals. You can find out more details as to why in our blog ‘Why CEST isn’t best’.

Fully automated IR35 status tools
Fully automated IR35 status tools usually rely on online questionnaires.

Pros: You get a quick response, which is good if you need to assess a contractor’s status quickly.

Cons: Again, any system relying on a rigid set of questions will likely throw up some indeterminate results, which then slows down your process. Some tools will then charge extra to see in-depth advice about the contract and working practices.

Verdict: If your contracts are complex or borderline, you may find yourself stuck having to seek more in-depth advice anyway, which risks further delay and extra costs.

Fully manual IR35 status tools
With this kind of tool, every contract is assessed by a human professional to create a status determination.

Pros: The bespoke service of a fully manual status tool makes sure that you get no indeterminate results.

Cons: A fully manual service will take longer to produce a result than an automated or semi-automated system (often 10 days or more). They also tend to be pricier than manual tools.

Verdict: Using a fully manual tool is probably overkill for straightforward engagements and is not a cost-effective way of working.

A hybrid status tool
A hybrid tool, such as the award-winning Kingsbridge status tool, combines an automated tool with manual intervention for indeterminate results. Read on to find out more.

How can Kingsbridge help HR professionals with IR35?
The Kingsbridge status tool has been designed to offer an alternative solution for HR professionals and everyone in the supply chain; end clients, recruiters and contractors. Developed by Kingsbridge’s Head of Tax, Andy Vessey, who has successfully defended over 500 cases, the carefully worded question set can be completed online. In the event of an indeterminate result, the case will be passed to our in-house IR35 team of experts for manual review.

To find out more about the tool, or to book a demo, come see us at stand K30 at the CIPD event. Alternatively, if you’ve missed us, you can book a demo of the tool.