Introduction to IR35 Legislation
IR35 is a UK Tax Legislation designed to prevent “disguised employment,” where Contractors work as employees while taking advantage of the tax benefits provided by other Employment Statuses, such as a Limited Company or Self-Employed. As such, HMRC uses three parameters when auditing an End Hirer's Position to check if a worker is evading taxes, these are:
- The IR35 Status which is designated to the Placement
- The Status Determination Statement (i.e. SDS) which is a document created by the End Hirer that outlines the reasons why a given Placement falls Inside IR35 or Outside IR35, providing guidance as to which Worker Engagement Types are allowed for each Placement.
- The Worker's Engagement Type which describes a Worker's Employment Status and how they will be paid. A Worker can be engaged as a Limited Company, Self-Employed, PAYE, or under an Umbrella business.
The IR35 Status
In order to combat Employment Tax Evasion, it is a legal requirement for End Hirers to evaluate each of their Positions against a set of criteria devised by HMRC to determine whether a Position falls Inside IR35 legislation or Outside IR35 legislation. This in turn dictates which Worker Engagement Types are allowed under each Position and ensures that Agencies and their Workers pay their taxes correctly.
A Position can be designated with one of two possible IR35 Statuses:
- Inside IR35: Under this status, the Contractor is considered to be working in a manner similar to an employee and as such, they're required to pay PAYE tax and National Insurance.
- Outside IR35: Under this status, the Contractor is considered to be working in a fully independent manner from the End Hirer and as such, they are allowed to be paid under any Engagement Type, such as PAYE, Self-Employed, or use their Limited Company.
Who determines an IR35 Status?
As per HMRC legislations, determining a Position’s IR35 Status is the legal responsibility of the End Hirer, not Supply Chain Managers or Agencies.
If a contractor provides services to a Small Business outside of the public sector, it will be the Worker’s intermediary who is responsible for determining the IR35 Status. For more information about this scenario, please refer to the government website here.
The Status Determination Statement
In order to prove the IR35 Status of any given Position, HMRC requires all End Hirers to produce a Status Determination Statement, also known as SDS, which is a legal document outlining all the reasons why a Position falls Inside IR35 or Outside IR35. This document is then used by HMRC as part of their audits for IR35.
The Worker Engagement Type
An Engagement Type is simply the method used to pay a Contractor, which can be one of the following three types:
- PAYE
- Limited Company
- Self-Employed
Engagement Types under Umbrellas
If a worker is engaged under an Umbrella, the Umbrella will be the one processing the Worker's pay using one of the 3 Engagement Types above. Our IR35 Management Module is then able to gather the Engagement Type under Umbrellas, in order to provide an accurate IR35 risk assessment.
ENGAGE’s IR35 Risk Assessment Module
Who's Responsible for Managing IR35 on ENGAGE?
Although it is the End Hirer’s responsibility to determine the IR35 Status of their Positions and to create Status Determination Statements, the responsibility of managing IR35 on the ENGAGE Platform depends on whether or not they are working with a Supply Chain Manager (e.g. Master Vendor, Neutral Vendor, or Sole Agency).
- If the End Hirer is working with a Supply Chain Manager, it is the Supply Chain Manager’s responsibility to manage IR35 on the ENGAGE Platform on behalf of the End Hirer.
- If the End Hirer is not working with a Supply Chain Manager, it is the End Hirer’s responsibility to manage IR35 on the ENGAGE Platform.
ENGAGE IR35 Risk Assessment Algorithm Overview
Managing IR35 can be a difficult task with hefty legal penalties from HMRC to the End Hirer if not managed correctly. This is why ENGAGE created the IR35 Risk Assessment Algorithm which only works when the ENGAGE IR35 Risk Assessment Module is enabled. This algorithm automates the risk assessment of each Placement by taking into consideration three parameters from the Placement:
- The IR35 Status designated to the Placement (i.e. Inside IR35 or Outside IR35)
- The Status Determination Statement (i.e. SDS) designated to the Placement
- The Worker's Engagement Type assigned to the Worker on the Placement
IR35 Risk Assessment Types
On the Placements page, you'll see an overview of all of your Placement's risks in the IR35 Risk column. There are 4 different labels a Placement can receive which are all explained below:
Low Risk Assessment
This assessment can be identified by a green 'Low' tag that’s given to a Placement when it’s at a very low risk of violating IR35 legislation. Some examples of when this could happen are:
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A Placement’s Status is Outside IR35, which means the Worker's Engagement Type has little impact.
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The Worker’s Engagement Type is PAYE, or PAYE under their Umbrella, which means they are already paying taxes at source.
High Risk Assessment
This assessment can be identified by a red 'High' tag that’s given to a Placement when it does not meet the IR35 legislation. Some examples of when this could happen are:
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A Placement is missing a Status Determination Statement.
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A Worker's Engagement Type has not been registered.
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A Placement has been designated as Inside IR35 but the worker’s Engagement Type has not been registered.
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A Placement has been designated as Inside IR35 but the worker is engaged as Self-Employed or acting as a Limited Company, not paying taxes at source.
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A Placement has been designated as Inside IR35 and a worker is engaged under an Umbrella but the Umbrella is engaging the worker as Self-employed or Limited Company, not paying taxes at source
Excluded Assessment
This assessment can be identified by a dark grey 'Excluded' tag that’s given to a Placement when it has been excluded from receiving an IR35 Risk Assessment.
- If you decide that CIS is not a high risk, you can choose to exclude a Placement from an IR35 Risk Assessment by setting the IR35 Status as 'Excluded'. For more information about IR35 and CIS, please read IR35 for CIS.
Disabled Assessment
This assessment can be identified by a light grey 'Disabled' tag and appears when the IR35 Management Module has been disabled for a Client or VMS Configuration, meaning that Placements under this configuration will not undergo an IR35 Risk Assessment.
How to Manage Placements with High Risk Assessments
A Placement can receive a High Risk assessment for multiple reasons such as a missing IR35 Status, a missing Status Determine Statement, an unassigned Engagement Type, and more. To see the reason why a Placement has received a High Risk Assessment, open the Placement and refer to the IR35 Determination section. Here, you will find a brief description as to why the Placement has been designated as High Risk and how to resolved it.
How to enable/disable the IR35 Module
The IR35 Risk Assessment Module is usually configured at the time of onboarding but can be enabled or disabled at any time. To enable or disable the IR35 Risk Assessment module please contact our Onboarding team and let them know which Client or VMS Configurations require the enabling or disabling of the IR35 Risk Assessment Module.
Managing IR35
Once the IR35 Risk Assessment Module has been enabled, all Positions, Vacancies, and Placements will need to be designated with one of the 3 available IR35 Statuses (i.e. Inside IR35, Outside IR35, or Excluded). It’s important to designate the IR35 Status for Vacancies so that Agencies are aware of any Worker Engagement Type limitations when submitting a Candidate to a given Vacancy, and for Placements so that their individual Risk Assessments are be calculated accurately.
Creating Positions and Assigning IR35
An IR35 Status can be added to a Position immediately after it's been created and updated at any point after that. We strongly recommend designating the IR35 Status for all new Positions immediately after creation as any Vacancies or Placements created from that Position will automatically inherit the IR35 Determination, thus removing the need to manually designate it in the future.
Step 1. Log in to ENGAGE
Step 2. Navigate to the ‘Positions' page
Step 3. Click 'New Position'
Step 4. Enter all the Position details and click ‘Create Position’
Step 5. Click on 'Edit Status' in the IR35 Determination section on the newly created Position
Step 6. Choose the applicable IR35 Status from the dropdown
Step 7. Click 'Select' to upload the applicable SDS
Step 8. Click 'Update' to save your changes
Step 1. Log in to ENGAGE
Step 2. Navigate to the ‘Positions' page
Step 3. Open the Position that you’d like to update
Step 4. Click on 'Edit Status' in the IR35 Determination section
Step 5. Choose the applicable IR35 Status from the dropdown
Step 6. Click 'Select' to upload the applicable SDS
Step 7. Click 'Update' to save your changes
Please Note:
Updating an existing Position's IR35 Determination will not update any existing Vacancies and Placements using that Position; therefore you will need to manually update their IR35 Determinations, where applicable.
Creating Vacancies and Assigning IR35
When a Vacancy is created, it will automatically inherit the IR35 Determination assigned to it’s Position. Occasionally, a Vacancy may require a different IR35 Determination to the one inherited from it’s Position and can be updated without affecting it’s Position. The updated IR35 Determination will then be inherited by any Placements generated from the Vacancy.
Step 1. Log in to ENGAGE
Step 2. Navigate to the ‘Vacancies' page
Step 3. Click 'New Vacancy'
Step 4. Enter all the Vacancy details and click ‘Create Vacancy’
Step 5. Click on 'Edit Status' in the IR35 Determination section on the newly created Vacancy
Step 6. Choose the applicable IR35 Status from the dropdown
Step 7. Click 'Select' to upload the applicable SDS
Step 8. Click 'Update' to save your changes
Step 1. Log in to ENGAGE
Step 2. Navigate to the ‘Vacancies' page
Step 3. Open the Vacancy that you’d like to update
Step 4. Click on 'Edit Status' in the IR35 Determination section
Step 5. Choose the applicable IR35 Status from the dropdown
Step 6. Click 'Select' to upload the applicable SDS
Step 7. Click 'Update' to save your changes
Please Note:
Updating an existing Vacancy's IR35 Determination will not update any Placements which have already been generated from that Vacancy; therefore you will need to manually update their IR35 Determinations, where applicable.
Updating a Placement's IR35
If a Placement requires a different IR35 Determination to the one inherited from it’s Vacancy, it can be updated without affecting it’s Vacancy and Position. When the IR35 Status or Status Determination Statement is updated on a Placement, it will automatically trigger a re-calculation of it’s Risk Assessment and may result in a new IR35 Risk.
Step 1. Log in to ENGAGE
Step 2. Navigate to the ‘Placements' page
Step 3. Open the Placement that you’d like to update
Step 4. Click on 'Edit Status' in the IR35 Determination section
Step 5. Choose the applicable IR35 Status from the dropdown
Step 6. Click 'Select' to upload the applicable SDS
Step 7. Click 'Update' to save your changes
Key Considerations for Managing IR35 for your Supply Chain
Key Consideration 1
According to HMRC’s regulation, it’s the End Hirer’s responsibility to provide accurate IR35 Status Determinations and SDS Documents for each Position to their Supply Chain Manager.
Key Consideration 2
The Supply Chain Manager MUST systematically ensure that the correct IR35 Status and SDS Document is assigned and uploaded to every Position before creating any new Vacancies or Placements. This ensures that future Vacancies and Placements are created with the correct IR35 Status and Status Determination Statement.
If any Vacancies or Placements already exist, it is the Supply Chain Manager's responsibility to ensure each of them is manually updated to reflect the IR35 Status and SDS provided by the End Hirer, otherwise, this could lead to an incorrect IR35 Risk Assessment on the Placement, putting the End Hirer at risk of breaking HMRC Legislation.
Key Consideration 3
Agencies MUST ensure that each worker has been designated an Engagement Type during the Worker Registration process and must double-check it before they submit a worker to a Vacancy as the Engagement Type is a critical component of any IR35 Risk Assessment.
Key Consideration 4
IR35 Risk Assessments only apply to “Pending” and “In Progress” Placements (i.e. Active Placements).
The IR35 Risk Assessment Algorithm uses the current status of the Placement’s IR35 Status, SDS, and Worker Engagement Type to calculate its current IR35 Risk Assessment. Therefore, Placements created retroactively (i.e. with a Start Date and End Date in the past), will result in an inaccurate IR35 Risk Assessment.
Key Consideration 5
When working with Umbrellas, Umbrellas MUST confirm Worker Engagement Types set up by Agencies during the Worker Registration Process. This ensures that the Worker's Engagement Type is available for use by the IR35 Risk Assessment Algorithm when calculating the IR35 Risk Assessment of the Worker's Placement.
IR35 for CIS
The Construction Industry Scheme (CIS) is a UK Tax Scheme for the construction sector that allows construction workers to receive payments with a lower tax deduction (i.e. 20% rather than the standard 30% for unregistered workers) and gives them the ability to claim expenses and tax refunds through their annual Self Assessment, reducing their overall tax liability.
Given that CIS provides tax breaks and other benefits, CIS and IR35 remain a complex and inconclusive topic in the industry.
Some clients consider CIS entirely risk-free when it comes to IR35, while others avoid CIS workers altogether due to their perceived High Risk.
For those reasons, and in order to provide the highest level of safeguarding to End Hirers, CIS does not impact the evaluation of any Engagement Types, instead we've developed a feature that allows End Hirers to Exclude any Position, Vacancy, or Placement from an IR35 Risk Assessment which prevents an IR35 Risk Assessment when deemed necessary.
Reporting on IR35
To make reporting IR35 easy, we have included IR35 columns in our Placements Report so that you can easily view any Placement's IR35 Status, IR35 Risk Assessment, the reason the Placement received the IR35 Risk, the Worker's Engagement Type, and if the Worker is working under an Umbrella, the Engagement Expected from the Umbrella, and the Engagement Confirmed by the Umbrella.
To download this report please follow the steps below:
Step 1. Log in to ENGAGE
Step 2. Navigate to the 'Placements' page
Step 3. Click on the options menu
Step 4. Click 'Download Placements Report'
Step 5. Open the Report and view all IR35 data
Useful links
The IR35 Risk Assessment Module relies on Placements, Positions, Vacancies and Engagement Types - below are the guides on how to manage them all: