If you’re a self-employed contractor you’ve probably already heard of IR35 legislation - but you may still be one of the many people across the UK scratching their heads about what it all actually means, especially as there are changes coming to IR35 in the private sector next month.
That's why we have put together a quick guide to answer the most frequently asked questions we’ve received on IR35 so far.
If you didn't already know, the changes to the off-payroll rules were due to come into effect on 6th April 2020. This was delayed until 6th April 2021 because of the spread of the coronavirus (COVID-19) pandemic. The delay was to help businesses and individuals deal with the economic impact of COVID-19.
What is IR35?
IR35 – also known as the off-payroll working rules – is tax legislation that HM Revenue & Customs (HMRC) put in place way back in 2000.
How has it come about?
The legislation was designed to combat tax avoidance by workers supplying their services to clients via an intermediary – Limited Company (Ltd) or Personal Service Company (PSC) – who would be classified as an employee if the intermediary was not used
HMRC have termed such workers as “disguised employees”, and if a contractor was found to be “inside” IR35 (believed to be more like an employee than an external contractor) they’d have to pay broadly the same income tax and national insurance contributions as if they were employed.
Who does IR35 apply to?
There are currently different rules for public sector and private sector contracts:
Public Sector: In the public sector, it’s up to the client receiving the services of the limited company contractor to determine the status for IR35. If they fall inside, the employer, agency or third party that pays the contractor will need to deduct the tax and National Insurance contributions and report the deductions to HMRC.
Private Sector: In the private sector, it’s down to the contractor to decide if the assignment a worker is being engaged to complete is within the rules (Inside IR35) or that the rules do not to apply (Outside IR35). However the upcoming change in the private sector is that the determination of the IR35 status will move to the client.
I’m a Private Sector contractor, when will the proposed changes apply to me?
The private sector IR35 reform is set for April 6th 2020.
From that date onwards clients that are utilising contractors in the private sector will become responsible for determining the IR35 status of any limited company contractors.
The exception to this rule is organisations that are recognised as ‘smaller businesses’ under the legislation. Smaller businesses are defined as any business where any two of the following apply – total number of employees no higher than 50, a turnover of no more than £10.2m or a total balance sheet no more than £5.1M
What falls outside of IR35?
When working out whether a contractor falls outside of IR35, there are a few factors taken into consideration. For example, the written contract between the limited company contractor and agency or end client as well as how that contract is reflected in actual day to day working practices.
Some of the other key factors considered are:
Is there a mutuality of obligation, is the client obliged to offer work and the worker obliged to accept it?
Can the worker be substituted for another or is their personal service required?
Does the client have control over the worker and their work? If yes, how much?
If the responses to the above indicate that there is a business relationship in place then the contract is deemed ‘outside’ IR35, if they indicate that there is an employment relationship then the contract is deemed ‘inside’ IR35.
If you’d like more information on the upcoming IR35 reform and what impact it is likely to have on you then please do get in touch withour Contract Consultants who will be able to assist you.
You can also take a look at theIR35 Hub provided by one of our Umbrella partners, Liquid Friday.