Have you heard about IR35 and wondered what it is? Or, maybe you’re a freelancer or contractor who knows a little bit about it but are unsure if it applies to you.
If you want to find out the ins and outs of IR35, let’s look at what it means and how the tax rules around it affect you.
IR35, often called ‘off-payroll working rules,’ is tax legislation introduced in the UK in 2000.
Its primary aim was to prevent ‘disguised employment’. This is where individuals who operate like regular employees use an intermediary to be paid for their services, reducing their income tax and National Insurance Contributions (NICs). An intermediary in this instance is often a personal service company (PSC). A PSC isn’t defined in law but is typically a limited company that a worker controls and has some interest in, through which the worker provides their services.
The legislation ensures that if a contractor functions similarly to an employee, they pay roughly the same Income Tax and NICs as employees.
IR35 Changes from April 2021:
Significant changes to IR35 rules were introduced in April 2021 for private-sector employers. Before these changes, it was up to the contractor’s intermediary to determine their IR35 status. Now, for medium and large businesses, it’s the responsibility of the hiring organisation to determine the IR35 status of a contractor.
Whom Does IR35 Affect?
You might be thinking, “Well, I’m not a contractor, so this doesn’t affect me.” However, IR35 has a broader reach. It impacts:
- Workers, Contractors and Freelancers – Especially those who provide services via an intermediary (like PSC, a partnership, or even another individual). If you’re partnered with an umbrella company as an employee, IR35 might not affect you directly.
- Employers (or Clients) – This includes anyone who uses the services of a contractor. They could be the engager, hirer, or end client.
- Agencies – Any entity that helps place workers in roles where they provide their services through an intermediary.
When Does IR35 Kick in?
IR35 rules become relevant when the worker (contractor) who provides services to a client through their intermediary would have been an employee if they provide their services directly to that client.
Who gets to decide if a contractor falls under the scope of IR35 depends on the client’s sector and size:
- Public Sector: The client makes the determination.
- Private & Voluntary Sectors: Typically, the client decides. However, if the client is a small business, the onus is on the worker’s intermediary.
- Agencies: Regardless of size, agencies have specific responsibilities under the IR35 rules.
How Does it Work?
The key is understanding the concept of ‘inside IR35’ and ‘outside IR35’:
- Inside IR35: If your working arrangement is similar to traditional employment, you’re ‘inside IR35’. You may need to pay the same tax and NICs as an employee. However, you won’t necessarily receive traditional employee benefits, such as pension contributions or paid leave.
- Outside IR35: If your arrangement is genuinely that of a business providing services, you’re ‘outside IR35’, meaning you can be paid gross and manage your own taxes.
If a client determines that a contractor falls within the IR35 rules, they must:
- Produce a Status Determination Statement (SDS) detailing the reasons for this determination.
- Deduct Income Tax and employee National Insurance contributions from the fees given to the contractor’s intermediary.
- Pay Employer National Insurance contributions and, if applicable, the Apprenticeship Levy to HMRC.
Factors Determining IR35 Status
These aren’t the only determinants but are some of the most pivotal:
- Supervision, Direction, and Control: How much say does your client have over how, when, and where you complete the work?
- Substitution: Can someone else replace you, or are you personally required to provide the services?
- Mutuality of Obligation (MOO): Is the client obliged to offer you work, and are you obliged to accept it?
Navigating the IR35 Maze
If you’re puzzled about a worker’s employment status for tax, the government provides the Check Employment Status for Tax (CEST) tool to give you clarity.
Another critical point is that the IR35 assessment is on a contract-by-contract basis. This means a contractor could have multiple assignments, some under IR35 and some outside its ambit.
How Do The Rules Affect You?
- Financial Implications: As a contractor, being ‘inside IR35’ could significantly increase the tax and NICs you owe. Some contractors have seen their net income reduced by up to 25%.
- Contractual Changes: Companies wary of the IR35 legislation might change how they engage with freelancers and contractors, opting for short-term engagements or using umbrella companies.
- Administrative Burden: There’s an increased administrative load, especially for employers who need to determine the IR35 status of every contractor they engage.
- Potential for Disputes: As with any tax matter, disagreements can arise over whether a contractor is genuinely ‘inside’ or ‘outside’ IR35. It’s crucial to ensure all contractual agreements are clear and to seek expert advice if you need more clarification.
Understanding IR35 rules: extra tips
The IR35 rules can be complex, so here are our extra tips for contractors affected by IR35:
- Keep good records. Keep good records of contractors’ work, including their contracts, invoices and timesheets. This demonstrates they are not your employees and are not subject to the IR35 rules.
- Review your contract. If you’re working through a PSC, review your contract to ensure it’s IR35 compliant. If not, you may need to renegotiate the contract with the company.
- Get professional advice. If you’re unsure whether the IR35 rules apply to you, always seek professional advice from an accountant or tax advisor. They’ll be able to help you understand the rules and make sure you are compliant.
Here to help
If you’re a contractor, or an employer or agency working with contractors, it’s essential to understand the IR35 rules and how they may affect you.
We hope you found this article useful and that it has helped clear up any questions you have, but if there are areas you’d like more information on, or for any other matters around tax and payroll, we’re always here to help.