If you are new to contracting then the information below will be helpful:
What is IR35
Introduced in 2000, IR35 legislation is used to determine the employment status and the subsequent tax status of an individual. Depending on your contractual arrangements and working practices you will be determined as either inside or outside of IR35. If you are deemed inside IR35 your tax status is essentially one of a typical employee whose taxes should be deducted at source and paid to HMRC. If you are deemed outside IR35 you will have the opportunity to operate through a Limited Company where your payment arrangements are more flexible, giving you the option to receive dividend payments. It is important to note that in checking the IR35 status, both the contract and working practices must be reviewed and as such, it’s important you take professional advice on this matter.
What is Supervision, Direction and Control (SDC)?
Supervision, Direction and Control (SDC) is a very significant term for contractors to be aware of. It essentially refers to the interpretation of a contractors working arrangements on whether they perform their work under the supervision, direction and control of another person. Determining whether SDC does or doesn’t apply to a contractors working arrangements will help to determine if they fall inside or outside of IR35 (which will then determine the contracting options and tax status).
What is Mutuality of Obligation (MOO)?
Is the client obliged to offer you work and are you obliged to accept any work offered?
Mutuality of obligation, or MOO, is one of the IR35 key tests of employment used by a tax tribunal or court to establish whether a contractor is in fact a disguised employee and therefore subject to the provisions of IR35. If found inside IR35 during an investigation by HMRC or in a subsequent court or tribunal enquiry, contractors potentially face steep bills for additional income tax, National Insurance Contributions (NICs), interest and penalties. Put into context, mutuality of obligation is generally considered by experts to be a less strong IR35 factor compared to control and substitution but is still seen as a significant pointer towards employment if found to apply.
Why do Public Sector contractors us umbrella’s?
A. If you are a contractor who works for a public-sector client it is likely you will be required to use an umbrella company for your contracting / payment arrangements. This is due to reform in legislation introduced in April 2017 which made public sector bodies responsible for any un-paid taxes by contractors operating through their own Limited Companies whilst working on public sector contracts. Due to the associated risks many public sector bodies now insist their contractors use PAYE umbrella providers where their taxes are paid at source, reducing the risk faced by the public sector entity for unpaid taxes.