HMRC introduced IR35 (aka the ‘off-payroll working rules’) to legislate what it calls ‘disguised’ employment.
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In 2020, the UK government announced that reforms to the off payroll working rules (IR35) would be postponed until 6 April 2021 due to the pandemic.
The name IR35 originates from this press release published at the time by HMRC.
So what is IR35?
IR35 assesses whether a contractor is a genuine contractor as opposed to a ‘disguised’ employee, for tax purposes.
IR35 are 2 sets of anti-tax avoidance legislation, designed to combat tax avoidance by employers and contractors who supply services to their clients via an intermediary, such as a limited company, but who would otherwise be deemed as an employee if the intermediary was not used.
IR35 seeks to limit contractors and their clients taking advantage of tax rules by working in a self-employed style, when they should be deemed employees.
We’re a small company. Does IR35 apply to us?
New IR35 rules apply exclusively to private sector medium-large sized businesses and all public sector companies. By virtue of the Companies Act 2006 provisions, small private sector businesses are exempt from the IR35 rules.
How do I know my business is classed as ‘small’?:
- Annual turnover must be less than £10.2 million;
- Balance sheet total must be less than £5.1 million; and
- You have up to 50 employees
I am a contractor working for a public sector/large private sector business. What does this mean?
- Under IR35, you must pay the same tax as you would if you were an employee. You may also be entitled to additional employee/worker rights (e.g. minimum wage, maternity pay, discrimination protections)
- You will also have to pay a ‘deemed employment payment’ when the current tax year elapses, to account for any tax deductions or NIC that an employee would have paid. Work out what you owe here
I operate as a business and am therefore outside of the IR35 rules. What does this mean?
If you operate as a genuine business, you are outside of the IR35 rules. Some indicators that you fall outside of IR35 include:
- You can pay yourself a salary
- You can withdraw further income as dividends (not subject to NIC) whilst your limited company pays tax only on its profits at the corporate 20% rate
- You have your own business insurance
- You own your own equipment
- You market yourself using a professional website
- You work with multiple clients
What do the IR35 changes mean?
In 2000, when IR35 first came into force, contractors were responsible for assessing their own IR35 status; it was the individual’s limited company/agency who had responsibility for accounting for any tax and NIC due where IR35 was applicable.
From April 6 2021, responsibilities for determining IR35 status and paying relevant tax will be passed from contractors to the private sector businesses engaging them – to align with the public sector.
Should HMRC decide status has been incorrectly assessed (operating inside IR35), the businesses will be held liable rather than the contractor.
IR35 private sector reforms exclude small business’, meaning contractors who engage their services will have to set their own IR35 status.
IR35 applies to me. What do I do?
You will have to pay the extra income tax and NICs. To find out your employment status for tax click here
To find out how much you will have to pay, click here
- Keep an eye on the news for any related updates
- Ensure to maintain consistent assessments of your engagements
- Pay your tax and NI relevant to your status and keep records of payment
- Make sure the work you provide complies with your written agreements
- Review your IR35 status if anything about your working practices changes
- Keep due diligence records
- Ensure communication and agreement with your contractors
Please note that this article is purely advisory, and the official government IR35 guidance is available here.