What is IR35 and When Does It Apply?
IR35 is a term for the off-payroll working rules. It is made to evaluate whether or not a contractor is genuine or ‘disguised’, for the objective of paying tax. The regulation is designed to make sure that tax rates remain consistent and fair. By using the IR35 calculator, the worker can find out how much more tax one will need to pay when the contract comes under the IR35 rules. This calculator will determine the due tax amount based on the daily or hourly rate of the worker.
Contractors, who perform their duties through a limited company, get the benefit of tax efficiency. However, they do not obtain employee benefits such as sick pay and holiday benefits. They experience greater flexibility as well as control over their work.
Mirroring IR35 changes that were released in 2017 in the public sector, the private sector IR35 reform will witness workers losing their right in the determination of their IR35 status at the time of working with large-sized and medium-sized businesses.
The firm that engages with the contractor will assess whether or not the service provided by the worker will be delivered in a way that reflects employment (inside IR35) or IR 35 self-employed (outside IR35).
When does IR35 come into effect?
This is one of the common questions business owners and HR managers have on the top of their minds. IR35, or the “Intermediaries Legislation”, came into effect in April 2000 to deal with disguised employment but at first, it was applicable to public companies. In this case, employees set up “Limited” companies to decrease their tax bill but at the same time continue working in the same role as when they were employed as permanent employees. Later, in April 2021, IR 35 rules were applied to the private sector as well.
How does IR35 tax legislation work in Practice?
According to HMRC, the off-payroll rules are applicable when the worker “would be an employee when there is no intermediary or the limited company of the contractor”. IR35 legislation is also popularly known as the “intermediaries legislation” as it applies to workers that execute their services via an intermediary, instead of an employee.
The intermediary will be the personal service company or limited company. A personal service company is also a type of limited company wherein the contractor and the sole director own maximum or all of the shares. In this case, the contractor delivers services to its clients.
However, according to the government of the UK, there can also be a few other intermediaries as:
Another personal service firm
The independent contractor can offer their services to clients via their intermediary, or they could work via an umbrella company or agency.
IR 35 HMRC has a tool named CEST or “Check employment status for tax” that is used for checking whether or not IR35 applies to any contract, along with an IR35 helpline. Presently, there are different rules made for the private sector and public sector contracts.
Under Off-payroll working regulation in the public sector, the hirer has the responsibility to work out whether or not the contractor falls outside or inside of IR35. If IR35 contractor fall inside, then the agency, hirer, or another 3rd party who pays the contractor will require deducting national insurance contributions and income tax and reporting them to HMRC
Under Off-payroll working regulation in the public sector, the independent contractor is accountable for working whether outside or inside of IR35. If they fall within IR 35, then they will have to pay the tax along with the NICs due. This is all set to get changed from April 2021.
Changes for IR35 in 2021
IR35 reform in the private sector was set for April 2021. This is the time when the public sector off-payroll working regulations were applied to the private sector. Though, it was going to happen in April 2020 but got delayed by one year due to coronavirus.
IR35 tax changes imply that:
Large and medium-sized businesses will be responsible for working out the employment status of the independent contractor, and not the contractors themselves
Independent contractors will be provided the reasons behind the decision made in a Status Determination Statement. They have all the right to dispute the decision if they do not agree with it
Small businesses are completely exempt from the changes. When the contractor provides services for a small client, then the contractor will be accountable for working out their employment status
End clients are classified as small businesses when they fulfill two of the below-mentioned criteria, for two continuous financial years:
Annual turnover of not over £10.2 million
Balance sheet total of not over £5.1 million
Not over fifty employees
Factors to check on your IR35 Checklist
Here is the IR35 checklist that can help you in getting IR35 compliant
The contract specifies three principles i.e., direction, supervision, and control. If a worker can’t send any other substitute to complete the contract, then you would come within IR35.
If there is an obligation on the employer’s end to provide work, and a worker has to accept it, then he will fall inside IR35
If the worker not just provide services for the agreed work but also work on other tasks then, the contract will come inside IR35
If the client has provided equipment to the worker and he doesn’t own it, then s/he is likely to be classified as a disguised employee
If you are a business that outsources work to contractors, or freelancers, there are possibilities that IR35 and its future changes can impact you. Clients along with their advisors have to confirm whether or not the legislation applies to their operation, and identify areas where workers are providing services via intermediaries.
Clients must place necessary procedures to review engagements, issue SDSs, and invest time to ensure that they have the necessary appeals process in place either internally, or through an appropriate external advisor.
As the above changes will come into force on 6th April 2021, it is essential to understand you would get impacted and what you would require to do. By performing the essential checks and implementing the right processes, both parties can lower the chances of liabilities and expensive back payments.
Ensure that you clarify your relationship with the recruiter before the commencement of the contract by considering the above checklist. It is beneficial to seek a piece of expert IR35 advice. One can also take the help of professionals to manage their IR35 Contracts. Transformify is an UK workforce management company that brings a Freelancer Management System to help companies onboard, allocate temporary workers to projects and pay service providers, and contingent workforce.