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IR35 and What it Means for Your Business
On 6th April 2021, IR35 rules changed. So, who needs to know and what do they need to know?
If you are providing services to a client, and you are a contractor, or an intermediary that hires contract workers, you will need to understand the changes to IR35 as it could affect you. The new rules affect companies dealing with contractors and contractors themselves.
To start, you need to understand this – the new rules mean businesses must now determine whether their contractors work regularly enough to fall within the scope of IR35.
IR35 definitions are a little muddy. Stay with us. All will become clear.
What is IR35?
IR35 refers to two sets of tax legislation that were designed to prevent tax avoidance by contractors and the firms hiring them. It seeks to level up and make sure that contractors who are working in the same way as permanent employees pay the same tax and national insurance.
Following years of debate, tweaks and delays, the IR35 changes finally came into effect earlier this year (on 6th April 2021).
So, to get your head around the IR35 changes, you need to understand the following: if a contractor works onsite with a client, is managed by that client and uses equipment supplied by the client, or if the contractor leads a team of employees that work for the client, IR35 will most likely apply.
The new rules mean that the responsibility for assessing IR35 will move from individual contractors to the large and medium companies hiring those contractors.
Hopefully, it is becoming clearer whether IR35 could apply to your business.
Why was IR35 introduced?
The bottom line? IR35 is a piece of legislation designed to tackle tax avoidance. In the past, self-employed contractors set up limited companies to pay themselves through dividends, which are not subject to National Insurance.
IR35 isn’t new – it hasn’t just appeared out of the ‘tax’ woodwork. This legislative move was originally introduced by Gordon Brown when he was Chancellor in 1999. Then Phillip Hammond, as the-then Chancellor in 2016, took it further, legislating that public bodies using contractors would be responsible for IR35 enforcement. That amendment came into effect on 6th April 2017.
The new changes that have just been introduced this year, bring private corporations in line with the public sector.
What changed on April 6th 2021?
In a webinar on the IR35 changes, Lesley Murray at Taylor Hopkinson (a recruitment partner in the renewable energy sector) explains the changes:
“IR35 refers to the UK’s legislation aimed at taxing disguised employment at a rate similar to standard employment (disguised employees means workers who receive payment from a client via an intermediary, for example, their own limited company, and whose relationship with their client is such that had they been paid directly, they would be employees of the client). The reform places responsibility for assessing whether IR35 applies onto the private sector end user.”
Now private sector employers will be held responsible for determining whether IR35 applies to any contractor they hire. Where it is concluded that IR35 applies, it will now be up to the ‘fee payer’ to account for and pay related tax and NIC (including the cost of employer’s NIC) to HMRC.
Government guidance on the new IR35 rules states:
If your worker provides services to a public sector client, or a medium or large-sized client outside the public sector, they:
- should get an employment status determination from the client, as well as the reasons behind that determination
- will be able to dispute the determination given to them if they disagree with it
How do I assess whether IR35 applies?
HMRC has a ‘Check employment status for tax’ tool (CEST) on their website. Status determination statements must be shared with the contractor and the agency or third party.
Can I keep my current arrangements and stay out of IR35?
Many will be asking, “can I keep my current arrangement and stay out of IR35?” It’s a good question,though the answer isn’t straightforward. IR35 is a very complex topic. You won’t be able to decipher IR35 status simply by looking at a written contract.
There are many independent online tests (with hundreds of questions) that can help you to determine this (for which you will likely have to pay a fee). It is highly advisable to seek the help of your accountant or, in complex cases, a specialist tax adviser.
The million dollar question – how can contractors and businesses avoid IR35? – isn’t a simple one to answer. Ultimately, you will need to prove to HMRC that you are in business on your own account and not in the same vein as an employee. This means that you will need to highlight the way your work (contractor) differs from employees. Also, being able to demonstrate that you (the contractor) is not under the control of any manager at the client’s business will help your case.
Would it be worthwhile taking on more employed people instead of contractors?
Private sector businesses will now face a choice: continue to treat contractors as contractors and risk a hefty fine if HMRC takes a different view – or treat them as employees with the additional costs and responsibilities this involves.
Businesses will need to reassess their position when it comes to contractors or taking on permanent staff. Obviously, contractors offer much greater flexibility, but with the new IR35 rules, tax responsibilities may tip the balance.
As businesses get to grips with IR35 we may see businesses rebalancing the mix of PAYE employees and contractors.
Joblogic: helping businesses manage a diverse pool of workers
Managing a mix of both contractors and paid employees at multiple sites across multiple jobs takes a lot of organising. Many businesses still using spreadsheets may find this a chaotic and time-consuming part of their administrative load.
With new IR35 rules bedding in, there’s even more to think about. Now is the perfect time to centralise your contractors’ service operation into a single system. Joblogic’s cloud-based field management software will help streamline your business, improve administration, provide insightful reporting, and ensure compliance.
Are you ready to simplify workflows? Book a Demo with Joblogic’s expert team today and find out how we can help digitise your work processes.