IR35 is defined as ‘off-payroll’ working. Established in 1999, the IR35 is tax legislation that aims to stop individuals from avoiding tax by supplying their services to clients through an intermediary, like a limited company. Also known as ‘disguised employees’ by HMRC, these individuals, for all intents and purposes, look, act and are employees. However, rather than being on the payroll, they’re registered as limited companies, so they pay less tax.
Some contractors operate via a limited company set up. If the contractor would actually be an employee but for the limited company, then the IR35 rules apply. Originally the new rules were to be implemented on 6th April 2020. However, due to COVID-19, the UK Government has announced a delay, pushing the new regulations back to 6th April 2021.
Employing individuals as “contractors” can save the business a significant amount of money as they no longer have to pay employers’ National Insurance Contributions (NICs) or provide employment benefits like paid holidays, pensions or sick leave. Making it a win, win for businesses and contractors.
Post-April 2021, private sector employers will be held responsible for determining whether IR35 applies to any contractor they hire – which would require them to treat the contractor as an employee for tax purposes. This is already the case in the public sector.
Private sector businesses will therefore face a tricky choice: continue to treat contractors as contractors and risk a hefty fine if HMRC takes a different view – or treat them as employees with the additional costs and responsibilities this involves. There is widespread concern that genuine contractors will be classed as employees, and so will either take an unfair tax hit, or lose their contracts altogether.
Small business exemption to new IR35 rules
The new rules apply to ‘medium or large’ sized businesses in the private sector and all organisations in the public sector. There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the PSC and the new rules do not apply.
What does this mean for contractors?
If you work as a contractor via a limited company, but in reality, you provide services like an employee for your client, then HMRC believes that you are intentionally or unintentionally getting a tax benefit over others. Due to this being an unfair advantage, IR35 has been put in place to stop this and to increase tax revenues.Currently, in the public sector, it is the client’s responsibility to determine the IR35 status of a contractor.
If the contractor is caught within the rules, the client will place the contractor onto their payroll and will deduct income tax and National Insurance before paying the contractor. If the contract is in the private sector, IR35 requires the contractor or limited company to assess their position and make an extra payment to compensate for the additional tax and NIC that HMRC would have received on an equivalent employee’s salary. This planned change places the responsibility on the client in medium to large-sized companies, to determine whether the contractor falls inside or outside the IR35 rules.
What do companies need to do about IR35?
The requirement of the legislation states that all companies must take ‘reasonable care’ when assessing if roles are inside or outside of IR35. Taking a ‘blanket approach’ to assess all roles won’t deliver this. The potential financial penalties can be significant if incorrect steps are implemented, but there is time and support available to help. We have urged our clients to take a calm approach, but also suggested they think about these changes and to act now.
How long do I have to become IR35 compliant?
IR35 reforms for the Private Sector are due to be implemented in April 2021, and it’s important organisations are ready by this time and beyond, therefore, taking a proactive stance and mitigating potential risks from the offset will be key to a successful response.
Written and contributed by Centric HR – For further advice and assistant in IR35 please contact Centric HR.