Does IR35 apply to sole traders?
In a word, no…however…
Background to IR35
IR35 was introduced in 2000 with the aim of attempting to identify what HMRC defined as ‘disguised employees’ i.e. those that work through an intermediary (most commonly their own limited company or partnership), providing services to a client however the relationship that exists is more comparable to that of an employer/employee as opposed to that of a contractor providing specific services to a client and were it not for their PSC (intermediary) they would be an employee. The legislation aims to ensure these ‘disguised employees’ are paying the correct amount of tax.
Who does IR35 apply to?
As IR35 only applies to those working through an intermediary, this legislation does not apply to sole traders as they are set up to operate as self-employed individuals (without a limited company). Although IR35 does not specifically apply to Sole Traders, the issue of employment status for tax purposes does, the rules of which are very similar to the tests applied for identifying employment status for limited companies (IR35). This is based on how an individual carries out their day-to-day activities and focuses heavily on working practices. The employment status test for Sole Traders, has been around a lot longer than the new IR35 legislation, therefore it has always been the client’s responsibility to determine the employment status for tax purposes, for these workers, however, it has only been brought to light for most clients due to the recent IR35 changes in the private sector.
What is needed for sole traders?
For sole traders, if the client is engaging them directly, a client’s obligation is to determine the individual’s employment status for tax using a similar test to IR35 (e.g. substitution, control, financial risk, mutuality of obligations) and make any tax and NIC deductions necessary. If the sole trader is engaged via an agency then it becomes the agencies responsibility to determine the employment status, using a slightly different test which is limited to assessing whether the sole trader is subject to the supervision, direction or control of anyone in the supply chain (typically the client) in the manner in which they provide their services. The purpose of which is to identify if the individual is truly self-employed or they should be deemed as an employee for tax purposes and as a result, be subject to PAYE tax and NIC deductions (at source).
What are the differences between a sole trader and a limited company?
A key distinction that exists is that unlike the obligations within IR35 for limited companies (and partnerships) when it comes to Status Determination Statements (SDS’s) and providing a challenge process, there is no requirement to provide the Sole Traders with an SDS (this is for internal purposes only) and there is also no requirement to have a challenge process in place. Communicating the outcome and the individual’s employment status for tax will be sufficient.
We understand that legislation can be confusing which is why we are here to offer advice and ensure you and your contract workers are supported.
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