IR35 doesn’t affect umbrella workers – here’s why!
3 minutes to read
Some contractors supply their services via their own limited company, or ‘personal service company’ (PSC). This has associated tax advantages to reflect the increased risks and responsibilities of running a business. The intermediaries legislation (also known as the ‘off-payroll working rules’ or IR35) is a law that’s intended to prevent a contractor receiving these advantages when their working practices are actually more similar to those of an employee.
There are a variety of factors that help determine whether a contract is inside or outside IR35, such as the level of control the contractor has over when, where and how they work. If a contract is classed as ‘inside IR35’, the contractor is deemed to be a ‘disguised employee’ and must pay the same income tax and National Insurance (NI) as they would if they were employed.
Recent rule changes
IR35 has been in force since 2000, but entered the spotlight again 17 years later when new rules were introduced that specifically affect those contracting in the public sector. These rules shifted the responsibility for determining whether a contract is inside or outside IR35 from the contractor onto the public authority. If it’s inside IR35, it’s now the public authority or the recruitment agency (and not the contractor themselves) who must deduct the correct income tax and NI and pay it to HMRC.
In the private sector, it’s still the contractor who makes the call on their own IR35 status and is responsible for any resulting tax and NI liability. However, in his 2018 Budget, the Chancellor announced that rules in the private sector will be changing to match the public sector in April 2020, albeit with an exception for small businesses.
So how does all of this affect contractors who work via umbrella companies? Short answer – it doesn’t.
Remember, IR35 is a law that’s intended to stop tax avoidance by contractors who provide services via their own personal service company (PSC). It does this by obliging them to pay the same tax and NI as an employee, if their working practices most resemble those of an employee.
An umbrella company is an alternative to a PSC. Those who join an umbrella do not become directors of their own limited companies; they are employees of an umbrella company. As such, they already pay the same income tax and NI as any other employee, because that’s exactly what they are.
Therefore, IR35 is not applicable when the worker is paid through an umbrella company.
This is clearly confirmed by HMRC, whose guidance includes a list of situations which are outside the scope of IR35. It confirms that ‘the off-payroll working rules won’t apply if the agency, umbrella company or similar third party that supplies the worker directly employs them and deducts Income Tax and NICs.’
In short – when a contractor is employed by an umbrella company, no one needs to give IR35 a second thought.