IR35 Assessment – Why It’s Important?

IR35 Assessment
  • 21/06/2024
  • ,
  • Kausik Mukherjee

9th March 1999 was the day when Inland Revenue, the department responsible for tax collection in the United Kingdom, offered a glimpse of its planning to tackle the problem of disguised employment via a press release. Now, as the press release number was 35, it was widely known as IR35. Later on, this came into effect in 2000 via the Finance Act, and since then, the controversy around IR35 refused to subside. A lobby of freelancers and contractors vehemently protested against this legislation. In 2017, many reforms were introduced to this legislation which was named the off-payroll working rules. These rules were meant mainly for public sector contractors. Now, the ball is in the client’s court. He has to decide whether a contractor working for him will be subject to IR35 or not.

To understand the IR35 assessment, one should know what disguised employment is. Well, in this type of employment, limited companies run by essentially a single individual offer professional service to their clients. However, this was not the root problem. The problem lies in the fact that they also enjoy the tax advantages meant only for corporate structures. These individuals work like traditional employees but via an intermediary. 

What is the IR35 Assessment?  

So, an IR35 assessment is essentially the process that determines whether a contractor falls in the ambit of IR35 or not. To make an assessment, the client can take the help of HMRC’s Employment Status Manual. There are also several factors that a client must consider before making a decision. Some of these are whether a contractor can send some other contractor as his substitute to do his work or whether a contractor is working simultaneously for multiple clients or not. Now, once the assessment is over, the end client issues a document known as the Status Determination Statement (SDS). This document declares the status of the contractor and the rationale behind arriving at this conclusion. 

Why are IR35 assessments so important?

If it is found that a work arrangement of a contractor falls ‘inside’ IR35, he will have to pay Income Tax, National Insurance Contributions (NICs), and even the apprenticeship levy (if applicable). Similarly, if it is found that the work arrangement of a contractor is ‘outside’ IR35, the contractor can continue to work as a self-employed individual. He can then also avail the tax benefits entitled for self-employment individuals. Some of these are tax relief in office costs, work-related travel costs, etc.

If the IR35 assessment is not accurate, there can be multiple consequences. For example, there can be a hefty penalty imposed by the HMRC or worse, HMRC can initiate an enquiry, which means shelling out more money and a severe blow to professional reputation.  To avoid such an embarrassing situation, clients often use assessment tools.

Apart from the Check Employment Status for Tax (CEST) tool, there are several tools for IR35 assessment. Some even prefer to take insurance cover to protect themselves from penalties. However, seek professional help to avoid any non-compliance with HMRC.