What you need to know about IR35
IR35 is a tax law introduced to combat tax avoidance by workers supplying their services to clients via an "intermediary" such as a limited company - generally known as a personal service company (PSC) who would otherwise be an employee.
It is designed to make sure that individuals who work through their own limited company are contributing similar Income Tax and National Insurance Contributions as other employees do. If HMRC deems a contractor is being treated lust like a full-time employee, or is receiving similar benefits as a full-time employee, then this contractor is deemed as inside IR35.
The IR35 rules aim to tax ‘disguised employees’ who are working through their own companies and are taking advantage of the tax benefits that are available but are still working in a similar or identical manner to that of other employees.
Getting it right from 6 April 2021
The government has announced reforms to the off-payroll working rules (IR35). They were originally planned to come into action from April 2020. However, due to the ongoing spread of coronavirus (COVID-19), the policy will now be introduced with a 12-month delay on 6th April 2021.
The government remains committed to introducing this policy to ensure that people working like employees, but through their own limited company, pay broadly the same tax as individuals who are employed directly.
Who decides if IR35 rules apply?
If you work within the governmental sector:
The rules are different depending on who your end client is. If the end-client is within the public sector, then they are responsible for deciding your employment status. They are best suited in determining employment status as they know the contract and working practices of each contractor.
What will change from 6th April 2021?
The public sector client is already responsible for determining the contractor’s employment status for tax and they will continue to be responsible. Now they will need to provide the contractor with a ‘Status Determination Statement’ setting out their decision about whether the off-payroll working rules apply.
If you work within the private sector:
If your end client is in the private sector, then for now, the responsibility lies with you, the PSC. You are responsible for assessing each assignment individually and determine whether your contract is inside or outside the IR35. If you deem your assignment to be inside the IR35 then HMRC expects you to pay the correct Income Tax and National Insurance contributions.
If you are running a Personal Service Company, it is important that you understand the IR35 rules and whether they apply to all of your assignments. Otherwise you run the risk of a time-consuming tax investigation. If you are investigated by HMRC and you are found to be inside IR35 you might have to pay backdated Income Tax and National Insurance on top of a fine.
The following HMRC criteria may help you in determine whether or not the IR35 rules apply:
Does your client determine what you do, and how, when, and where you complete your day-to-day work?
One of the most important determinants of IR35 status revolves around the extent to which a client controls where, when and how an individual performs his work.
Are you under the direct control of your client?
A mutuality of obligation exists when an employer expects a worker to undertake work when asked to do so, and the worker expects to be given work on a constant basis.
If you do not think that you fall inside IR35, then you will need to demonstrate that the above factors do not apply to your contract and working practices.
What will change from 6th April 2021?
From the 6th April 2021 for most private-sector assignments the responsibility will be with the end client. Medium and large businesses will need to decide whether the IR35 rules apply to an assignment with individuals who work through their own limited company. Small end-user companies are exempt from the proposed new IR35 legislation (refers to businesses with a turnover of £10.2m or less.
You deem your assignment to be outside IR35 or out of scope for the off-payroll rules?
In this case please contact your accountant who will be best placed in advising you on all the options you have available.