IR35, also known as off-payroll working, is a piece of UK legislation designed to prevent individuals from avoiding tax by working as contractors. The controversial legislation is far from easy to understand and mostly brings groans around the country as it’s expected to affect a large number of self-employed people.
There are new IR35 rules coming into effect from 6th April 2021, which you need to understand to ensure compliance and avoid penalties.
Changes to IR35
Off-payroll working rules for the public sector were changed in 2017. The changes coming into effect this April are for private sector companies.
From 6th April 2021, medium and large-sized private businesses will become responsible for judging whether their contractors fall inside or outside the scope of IR35.
This is a big change, because up to now it was the contractors and freelancers’ responsibility.
Depending on your company’s structure, it’ll be the duty of Hiring Managers, HR teams, Finance or Legal teams.
The small company exemption
There is no change to the rules for small businesses. According to the Companies Act 2006, a small business has two or more of the following features:
- An annual turnover of £10.2m or less
- A balance sheet total of £5.1m or less
- 50 employees or less
If your business meets two or more of these requirements for two consecutive financial years, you class as a small business and the new rules don’t apply to you. If not, however, you must apply the off-payroll working rules.
What does outside IR35 mean?
To be “outside IR35” means operating a genuine business, so HMRC sees a contractor as genuinely self-employed for tax purposes.
Here’s some handy criteria to help you determine if your contractor is working “outside IR35”:
- Self-employed workers are normally paid on a project-to-project basis
- Have full control over how they complete their work, for example set their own working hours
- Use their own equipment
- Remain separate from your business, which means they can’t, for example, manage other employees
- And they work for other clients
Of course, these are just a few factors to help you decide the tax status of your contractors. It’s not a straightforward matter, which often leads to confusion.
HMRC offers a tax status checker tool, however, in 2020 it returned nearly 20% of cases as inconclusive. Many people feel frustrated with its unreliability, so it’s probably best to study the rules rigorously yourself and assess each contract individually.
What does inside IR35 mean?
For a contractor, being found “inside IR35” is possibly the worst nightmare. What it means is that HMRC considers them an employee for tax purposes of their end client. They’re subject to PAYE, which inevitably will lead to them having less money in their bank accounts. Additionally, they still won’t benefit from any employment rights or protections. It’s a grim outcome, which many say could bankrupt the freelancing industry.
As the end client, you have to ensure contractors “inside IR35” pay the correct income tax and NI contributions. You’ll have to match their NI and also work out their “deemed payment” (the amount of tax and NI due at the end of the tax year) and deduct it from their invoice. Calculating deemed payments is complex, so check the government’s website for how to do it.
If you hire contractors, either from time to time or on an ongoing basis, then you should check if your contractors fall inside or outside IR35 to avoid penalties for non-compliance.
Ensure IR35 compliance today
The new off-payroll working rules are complex and will have a huge impact on your company’s finance, legal, and HR teams. Ensure your employees fully understand the changes and their new responsibilities by completing an IR35 – Off-Payroll Working online course. The 15-minute course will help you assess if the IR35 rules apply, what you should do next so you can be confident and avoid fines.