All umbrella companies should pay their workers via PAYE. This is why IR35 is not an issue for their employees. An individual with their own single person Limited Company (or personal service company), whose working practices put them outside of IR35 could draw dividends from their company. However that same individual whose working practices put them inside, would have to be paid a salary. This would be subject to income tax and both employee’s and employer’s national insurance contributions.
IR35 is not something that a contract can opt-out of; unlike the Conduct of Employment Agencies and Employment Businesses Regulations. It’s also not something that can be avoided by changing a contract.
The three main considerations with IR35 are:
Mutuality of Obligation
Is the worker obliged to accept the work offered and is the agency obliged to offer it?
Supervision, Direction and Control
Will the worker be supervised and given instructions on how to perform tasks or advised what work needs to be undertaken by a member of staff at the client site?
Right of Substitution
Is the worker obliged to do the work themselves and do not have the option of sending in someone else to do the work instead.
If these answer to all 3 of these questions is ‘yes’, then the worker will almost definitely fall inside IR35.
HMRC have now introduced a series of tests for contractors which will allow them to assess whether or not they are at high, low or medium risk of failing an IR35 investigation. They are referred to as Business Entity Tests.
From 2014, all Limited Company (PSC) workers will have to declare their IR35 status on their self-assessment forms; if they declare that they are outside then HMRC will automatically demand proof. This ensures that HMRC have a constant supply of companies for investigation without having to go looking for them!
Public sector workers will also have to prove their IR35 status to the satisfaction of the client if they secure a contract of more than 6 months duration and for more than £220.00 per day.