What is IR35 and will you be affected by this legislation?
You may be wondering what IR35 is and whether you’re going to be impacted by these new rules that come into force from April 2021. In this article we aim to provide an overview of what IR35 and ‘off-payroll’ working is and how it may affect businesses and individual contractors.
Visit the HMRC website or speak to an expert
This is a complex issue, and whilst we’ve included some useful information in our article, we recommend that you visit the HMRC website which has lots of information and tools to guide you through the process. It’s also advisable to speak to an IR35 expert if you’re unsure whether this impacts you or your business and what steps you need to take.
What is ‘off-payroll’?
The term ‘off-payroll’ refers to workers or contractors that provide their services to a business through their own limited company or via a third party (a partnership or personal service company). They aren’t employees of the company, and as such, they are subject to different tax and National Insurance contribution rules, compared to employees.
What is IR35?
Contractors don’t receive employee benefits when providing services to a business, but they can benefit from tax efficiencies. And organisations benefit from not having to pay National Insurance contributions for contractors.
With IR35, the HMRC want to continue to tackle what they refer to as ‘disguised employment’ and ensure that employees of the company and contractors or ‘off-payroll’ workers pay broadly the same tax.
IR35 assesses whether a contractor, would otherwise be considered as an employee for tax purposes, when the contractor takes on work for a client.
Working out if IR35 applies to a contractor
There are different rules for who needs to work out whether a contractor falls inside IR35 or not. The HMRC website states that from 6 April 2021:
- All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.
- If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.
What’s an intermediary?
An intermediary will often be a contractor’s own limited company or personal service company. They operate through their limited company to provide their services, rather than being considered an employee of the business.
For example, if a graphic designer worked for a medium to large organisation with the business having supervision, direction and control of the Graphic Designers work, under IR35, they could be considered as an employee, for the purposes of tax. But there are other factors to consider when deciding if a contractor falls within IR35 (see below).
As mentioned above, if a worker provides services to a small client in the private sector, it will be the intermediary that will need to determine the workers employment status and whether they fall under IR35. So, if you’re a contractor with your own limited company, it will be your responsibility to work this out.
I’m self-employed, do I fall under IR35?
The HMRC website has a tool you can you whether you’re a business or contractor, so you can use the tool to help check your status. You’ll need details of the contract your have with your client, what your responsibilities are, who decides what work needs doing, who decides when and how the work is done, how you’ll be paid and whether you’re entitled to any corporate benefits or are entitled to reimbursement of expenses.
To use the tool, click here.
I’m a small business owner, what do I need to do for a contractor that works for me/us?
The HMRC website states that small businesses are not responsible for determining whether a contractor falls within IR35 rules for tax purposes. You should advise your contractor(s) that their intermediary is responsible for assessing their IR35 status. See below if your business fits into the small business category.
For medium to large organisations and some charities, the rules are changing
Some rules already applied to public sector clients, but from April 2021, it will be the responsibility for medium and large businesses to determine the IR35 status for their workers.
As per the HMRC website, it specifically states that the rules will apply to businesses that meet two or more of the following:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million
- you have more than 50 employees
For more information, visit HMRC’s website.
You will need to communicate your determination to the worker or contractor by using a Status Determination Statement. Again, click on the link in the paragraph above for more information on this.
Workers can appeal the decision affecting their employment status
If your business is responsible for assessing a worker’s employment status, you must give them clear reasons as to how this status was determined. If they disagree with the determination, you’ll need to give consideration as to their reasons for disagreeing, assess whether to maintain or change the status and update them. Keep all records.