IR35, also known as the ‘off-payroll working rules’ is tax legislation designed to combat tax avoidance by people who work in a similar way to full-time employees but bill for their services via their limited companies to make their business more tax efficient. The legislation is designed to prevent workers from avoiding tax by operating as contractors, when really, they are employees in all but name.
Reforms to off-payroll working rules in the private sector were due to take effect in April 2020 but were delayed as businesses grappled with the coronavirus crisis. The changes will now go ahead in April 2021.
What is changing?
Currently, if your business hires a contractor who declares they are ‘outside’ IR35, then as a hirer you do not need to deduct tax or NI from the fees you pay them. Their fees are simply a business expense to your company.
From 6 April 2021, the reformed IR35 rules shift the responsibility for determining the tax status of a contractor from the worker to the organisation. This is already the case in the public sector.
What do businesses need to consider?
Some of the factors to consider when determining IR35 status are:
How is the contractor paid?
To stay outside of IR35, self-employed contract workers are usually paid on a project-by-project basis, which is normally when work reaches a specific milestone or comes to an end.
The contractor must have complete control over how they complete their work for a contract to fall outside of IR35. If you set their working patterns or provide excessive input over how they complete their work, HMRC are more likely to view this as employment rather than contract work.
If you provide the contractor with equipment rather than them using their own, this could result in HMRC viewing them as an employee. A contract should make it clear that the contractor is obliged to use their own equipment, otherwise they are likely to be viewed as an employee by HMRC.
Contractor remains separate from your business
If you allow the contractor to become an integral part of your business, such as managing other employees, this indicates employee status as opposed to self-employment.
If you are using the same contractor over a long period of time, HMRC are likely to view this as an employee-employer relationship, meaning the contractor falls within IR35.
Checking employment status for tax (CEST)
If you are unsure if a worker should be classed as employed or self-employed then we would recommend that you check the following gov.uk site – https://www.gov.uk/guidance/check-employment-status-for-tax
Exemption for small companies
In the private sector the new rules will only apply to medium and large businesses that are the end user of the worker’s services. Where the end user of the worker’s services is a small business, the responsibility for assessing the arrangements, and applying IR35, will remain with the contractor. A small business as defined by the Companies Act 2006, is a business that has two or more of the following features:
a turnover of £10.2m or less;
a balance sheet total of £5.1m or less; and/or
50 employees or less.
If IR35 applies – what does a business need to do?
If you determine that IR35 rules do apply, you will need to need to deduct income tax and employee NICs and pay employer NICs to HMRC.
Private sector employers hiring contractors will be responsible for determining their IR35 status from 6 April. If you haven’t already done so, we recommend that you review all your current contracts to ascertain if they are fit for purpose.