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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 itโs 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.
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 contractorโs and freelancersโ responsibility.
Depending on your companyโs structure, itโll be the duty of Hiring Managers, HR teams, Finance or Legal teams.
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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:
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 donโt apply to you. If not, however, you must apply the off-payroll working rules.
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To be โoutside IR35โ means operating a genuine business, so HMRC sees a contractor as genuinely self-employed for tax purposes.
Here are some handy criteria to help you determine if your contractor is working โoutside IR35โ:
Of course, these are just a few factors to help you decide the tax status of your contractors. Itโs 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 itโs probably best to study the rules rigorously yourself and assess each contract individually.
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For a contractor, being found โinside IR35โ is possibly the worst nightmare. What it means is that HMRC considers them an employee for tax purposes of their end client. Theyโre subject to PAYE, which inevitably will lead to them having less money in their bank accounts. Additionally, they still wonโt benefit from any employment rights or protections. Itโs a grim outcome, which many say could bankrupt the freelancing industry.
As the end client, you have to ensure contractors โinside IR35โ pay the correct income tax and NI contributions. Youโll have to match their NI and also work out their โdeemed paymentโ (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 governmentโs 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.
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The new off-payroll working rules are complex and will have a huge impact on your companyโs finance, legal, and HR teams. Ensure your employees fully understand the changes and their new responsibilities by completing an IR35 โ Off-Payroll Working online course. The 15-minute course will help you assess if the IR35 rules apply, and what you should do next so you can avoid fines.
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