IR35 for Accountants

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What accountants need to know about IR35

For any accountants working with contractors, a good working knowledge of IR35 should be high on your list of priorities. Whether you’re a specialist contractor accountant looking to keep on top of their knowledge, or a more generalist accountancy firm looking to better support their contractor clients, we’ve got you.

As an accountant, there are a number of circumstances in which a contractor will come to you for help relating to their IR35 status. Whether it concerns tax payments, expenses, or financial records, it’s best to know what support they might need and when.

Whilst IR35 is a rather niche topic, having a good understanding of the basics should be fairly straightforward with the right guidance. We work with a number of accountancy practices here at Qdos, using our extensive experience to offer support and advice that our clients can trust.

IR35 explained for accountants

Introduced in April 2000, IR35 was brought in by HMRC to prevent tax avoidance through the use of personal service companies (PSCs). It requires the assessment of a contractor’s employment status to determine how much tax they need to pay.

If the contractor is outside IR35, they can draw down their income as dividends and manage their finances tax efficiently. If the contractor is inside IR35, they need to pay a ‘deemed payment’ on this income, similar to as if they were an employee of their client.

The legislation has had a series of changes (IR35 reform) which were brought into the public sector in April 2017 and the private sector in 2021. IR35 reform impacted which party was responsible for determining IR35 and who was liable make the tax payments. Before reform in either sector, all of the responsibility for IR35 lay with the contractor. Now, it’s slightly more complicated:

  • For the tax years from 2000/21 until 2017/18, limited company contractors were responsible for applying IR35 and need to have paid tax accordingly.

  • For the tax years 2017/18, 2018/19, 2019/20 and 2020/21, contractors were only responsible for contracts with a private sector client. Any engagements with a public sector body became the responsibility of the public sector organisation.

  • For the tax years from 2021/22 to date, only contractors engaged by a small business in the private sector need to apply IR35 and pay tax correctly themselves. For any engagements with a medium or large private sector business or public sector body, it’s the responsibility of the end client.

This adds some complications to the accounting where a contractor has multiple contracts across different clients in a single tax year. In reality however, most contractors will seek either all outside-IR35 contracts or simply utilise an umbrella company/other PAYE arrangement. In the less likely scenario that a contractor is working inside IR35 via their PSC, it’ll need to be factored in that their tax will already have been deducted and paid to HMRC by the fee-payer in the supply chain.

How to help your contractors with IR35

Where a contractor is responsible for their own IR35 status, they may be required to make a ‘deemed payment’ should they be engaged inside of IR35 (in other words, operating in a way where they are deemed an employee for tax purposes).

A deemed payment is made at the end of the tax year and accounts for any tax and National Insurance incurred as a result of working inside IR35. 

How to calculate a deemed payment.

If a contractor is ‘inside IR35’ for an engagement, whether the IR35 responsibility is theirs or not, they will be unable to claim any travel and subsistence expenses for that engagement. This will have to be taken into account for their expense claims.

When it comes to a HMRC enquiry, regardless of whether a contractor is inside or outside of IR35, they’ll be required to provide evidence of their IR35 status, copies of their contracts, and their accounts for a specified period.

As their accountant, it’s likely you’ll be their first port of call. In these circumstances it’s worth first checking whether the contractor has any tax or IR35 insurance in place as they may need to approach their insurer before making any contact with HMRC.

Qdos have over 23 years of experience supporting contractors going through an enquiry. View our case study of an enquiry passed to us from an accountant.

For contractors needing to determine their own IR35 status, they’ll need to review their engagement based on IR35 status tests. This is typically done by reviewing the written terms and/or working practices.

Many accountants don’t have the in-house resources to do this, even if they do have the expertise. Outsource your IR35 contract reviews to Qdos and we’ll take care of the assessments on your behalf.

View IR35 Contract Reviews.

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