IR35 – glossary of terms

With the IR35 Private Sector changes being postponed to April 2021, now is the perfect time to brush up on your IR35 terminology, to ensure you’re ready to hit the ground running when the time comes. We’ve put together this handy IR35 glossary of terms, to help you start preparing for the changes.

CEST tool (Check Employment Status for Tax): The CEST online tool helps clients determine a contractor’s IR35 status. It works by them answering a number of questions regarding the contractor’s engagement, and the tool decides that contractor’s status. Designed by HMRC, it’s widely considered flawed, and many contractors aren’t keen on it being used. Whilst this is the case, it’s still important to understand what it is should it be used by your client to determine your status.

Contractor – is a self-employed person who provides their services to an end-hirer or client, typically either through a Limited Company or Umbrella company. They work for themselves, choosing the contracts they wish to complete, and are in charge of sourcing their employment once a contract has ended.

Control – refers to the level of control your client has over your working practices, and forms part of the three elements which makes up HMRC’s IR35 test – MSC (Mutuality of Obligation, Personal Service, and Control). The more control you as the contractor are able to demonstrate over your contract, so when, where and how you work, the more likely it is that you can demonstrate that you are outside IR35.

Deemed Employment Payment (DEP) – a DEP is a way to account for relevant income which is in fact employment income. For example, should you be working via a Limited Company and your contract be found ‘inside’ IR35, then your accountant will need to calculate your DEP. This is done once a 5% expenses allowance has been deducted, along with any other allowable costs, such as your company pension contributions.

DEP is submitted to HMRC during the same tax year in which you’ve received the relevant income.

It’s worth noting that DEP is set to change in April 2021, along with the new IR35 rules, so be sure to speak to your accountant to fully understand how you might be affected.

Disguised employee – is a contractor who claims to be self-employed by working through an intermediary (such as a Limited Company), but is actually employed. So whilst they’re reaping all the benefits that come with being self-employed (such as access to certain tax benefits which the employed are not entitled to), they are also enjoying employee benefits, such as sick pay, annual leave, etc. IR35 was designed to seek out those contractors who are abusing this system, and to ensure everyone receives the correct benefits based on their employment status.

End-hirer / client – is the person or company a contractor provides their services to. As of April 2021 it will be their decision to determine all contractors’ IR35 statuses, regardless of whether the contract is within the Public or Private sector.

Fee payer – is either the agency or end-hirer who will pay you, once work is completed. If using an Umbrella company the fee payer will pay the Umbrella, who in turn will pay you once all relevant deductions have been made. If you’re Limited then the fee payer will pay you directly.

Inside IR35 – refers to either your working practices, contract, or both mirroring those of a permanent employee, and meaning that you must be taxed accordingly. For more information on your IR35 status, take a look at our free guide on IR35 in the Private Sector.

Limited Company – is a legal entity in its own right, and is a popular choice for contractors when choosing how to run their contracting business. Thinking about setting up your own Limited Company, or wondering what’s involved in the day-to-day running of your own company? Take a look at our free guide now.

Mutuality of Obligation (MoO) – refers to the extent you’re obliged to complete any contractual work that’s offered to you, or in the same breath any work which is considered ‘extra’ outside of your agreed contract.

If your working obligations are clearly defined and set out in your contract prior to commencement and your work is limited to those obligations, it strongly suggests that your contract and working practices are ‘outside’ IR35.

MoO forms the second part of HMRC’s IR35 test – MSC.

National Insurance Contributions (NICs) – anyone aged 16 or over working in the UK earning over £166 per week / £8,632 per year must pay National Insurance Contributions (NIC). Once paid, you’re entitled to benefits such as basic state pension and maternity allowance.

 Off-payroll working through an intermediary – as a contractor, if you’re working through your own Limited Company, then you are defined as being off-payroll and working through an intermediary.

Outside IR35 – if found ‘outside’ IR35 your working practices and contract have been deemed as ‘truly self-employed’ and you will be entitled to the relevant tax benefits and ability to pay yourself a mixture of dividends and salary. This in turn keeps your Tax and National Insurance Contributions to a minimum, meaning you’ll be able to take home more of your contractor pay than say that of your employee equivalent earning the same base pay.

PAYE (Pay As You Earn) – everyone must pay income tax to HMRC, and PAYE is one way of doing so. PAYE means your employer pays your tax contribution on your behalf directly to HMRC, and takes this amount from your pay.

Personal Service Company (PSC) – is another name used by HMRC for a Limited Company contractor.

Private Sector – contracts which are classed as Private Sector contracts.

Public Sector – contracts which are from within UK services such as the government, NHS, education and general services are all classed as Public Sector contracts.

Recruitment agencies – used by contractors to find their next contract. Many decide to use agencies, as it can take away the stress and strain of having to source new contracts yourself. They are also able to connect you with new clients, and be able to offer advice and support on negotiating rates and contractual terms.

Substitution – if you’re able to send a substitute in your place during your contract, then this will strongly suggest that your contract and working practices are ‘outside’ IR35. Substitution forms the third and final part of HMRC’s IR35 test – MSC.

Working practices – your day-to-day working patterns and activity form your working practices, including the relationship you have with the end-hirer / client.

IR35 support when and where you need it most

Hopefully our IR35 glossary has helped you to understand further what some of these terms mean and how they relate to your working practices as a contractor. But should you need a more in-depth understanding of what IR35 is and how it affects you, download our free guide.

Alternatively speak to our director-level accountants about the unlimited IR35 support our clients enjoy on a daily basis. No limitations to the amount of support you’ll receive or the number of contracts you can have reviewed, just open and specialist advice from experts who want to guide you on the right path. Get in touch today.