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IR35

Last year the government announced it would be postponing the reforms to the off payroll working rules (IR35) from April 2020 to 6 April 2021. This was a deferral, not a cancellation due to the Covid pandemic and so was delayed for 12 months.

HMRC introduced IR35 (or the ‘off-payroll working rules’) in April 2000 to tackle what it calls ‘disguised’ employment. IR35 takes its name from the original press release published by Inland Revenue (now HMRC).

What is IR35?

IR35 is designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax.

It is two sets of tax legislation that are designed to combat tax avoidance by workers, and the organisation hiring them, who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.

Some contractors and their clients try to take advantage of this tax efficiency by working as if they’re self-employed, when for all intents and purposes they’re employees.

Does IR35 apply to small companies?

The new IR35 rules only apply to medium or large sized businesses in the private sector and all companies in the public sector. There is an exemption for clients who are classified as small businesses as defined by the Companies Act 2006.

To qualify as a small business, a company has to meet two or more of these criteria:

  • Annual turnover is no more than £10.2 million
  • Balance sheet total is no more than £5.1 million
  • No more than 50 employees

Operating inside IR35

  • Under the IR35 legislation, you must pay the same tax as an employee. This could also mean that you are entitled to additional rights as an employee or worker (e.g. minimum wage, maternity pay, protection from discrimination).
  • You will usually have to pay a ‘deemed payment’ of income tax at the end of the tax year to account for any tax deductions or NIC that an employee would have paid.

Operating outside IR35

To be ‘outside IR35’ means that you are operating as a genuine business, and therefore operating outside of the IR35 rules.

  • You can pay yourself a salary and withdraw further income as dividends (which are not subject to NIC), whilst your limited company pays tax only on its profits at the corporate 20 per cent rate.
  • Indicators that you operate outside of IR35 include having your own business insurance, owning your own equipment, marketing yourself using a professional website and working with multiple clients.

Check list – feel free to download below

What will the changes mean?

When IR35 first came into force in 2000, each contractor was responsible for assessing their own IR35 status and it was the individual’s limited company or agency who was responsible for accounting for any tax and NIC due where IR35 was applicable.

In April 2021 there will be new changes, meaning the responsibility for setting IR35 status and paying relevant tax will be passed from contractors to the private sector businesses engaging them – like in the public sector. This also means that these businesses will be held liable should HMRC decide status has been incorrectly assessed (operating inside IR35)

The IR35 changes in private sector exclude ‘small’ businesses, this means contractors who work for them will have to set their own IR35 status.

What do I do if IR35 applies?

If IR35 applies you will have to pay the extra income tax and NICs. To find out your employment status for tax visit:-

https://www.gov.uk/guidance/check-employment-status-for-tax

To find out how much you will have to pay visit :-

https://www.contractoruk.com/calculators/ir35_tax_calculator.html

What should I do?

  • Always keep an eye on the news.
  • Maintain up to date assessments of your engagement
  • Pay your tax and NI relevant to your status
  • Make sure working practices comply within your contract
  • Review each element for IR35 status
  • Keep records of your due diligence
  • Ensure communication with your contractors
Could I be affected by IR35 IR35 checklist

The rules around IR35 aren’t without their problems. IR35 is a very broad legislation and can be sometimes hard to understand.

More detailed information at

https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

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