đź•’ Article read time: 3 minutes
What is IR35 and does it affect you?
Ryan Barnett, Economics and Research Manager, Logistics UK
IR35 is a government measure first put in place two decades ago to stop the practice of ‘disguised’ employees operating through self-employed intermediaries and paying less tax.
Known as ‘off payroll working rules’, the measures are due to change in April, meaning that if you are a contractor, agency or business using contractors you may have to make changes.
Here we set out who is affected and what you can do to make sure you are prepared for 6 April.
WHO DOES THIS AFFECT?
The government has made it clear this will not mean changes for genuine freelancers. It is targeted at those who have set up a Personal Service Company (PSC), who the government believes could include many people who are operating very similarly to employees. The legislation is aimed at identifying who this might be, termed as ‘inside’ IR35, and therefore who is liable to pay tax in a similar way to an employee.
What is changing is how the decision, or determination, is made. From 6 April it will fall with the client, prior to this, the decision was down to the PSC itself.
These changes were due to be made last April, but were delayed due to COVID-19 to give businesses more time to prepare. They only apply to those contracting with the private sector, as the changes were already made to the rules in the public sector in 2017.
The changes being made in the private sector do not apply to small companies, defined in the Companies Act 2006 (s382) as having at least two of the following:
- an annual turnover of less than £10.2 million;
- a balance sheet total of less than £5.1 million;
- fewer than 50 employees.
If the client decides the PSC status is ‘inside’ the new off payroll working rules, the ‘fee payer’ who pays the client will have to deduct Income Tax and National Insurance (Employers’ NI is 13.8% on top of whatever is paid to the employee) through the Real Time Information (RTI) system, exactly like an employee. The ‘fee payer’ may mean the client or the agency who engages the contractor – whoever pays the contractor’s fees.
I AM A CLIENT – WHAT DO I DO?
From now on, you will have to decide on the employment status of the contractor(s) you engage and provide them with a Status Determination Statement (SDS), including your decision and the reasons for concluding so. You will have to take reasonable care in making the decision and the contractor can disagree with the decision. They can lodge this disagreement up until the final payment and you must reply within 45 working days.
To determine the status of the contract in question, the client must assess the contract and relationship with the contractor to work out if this working relationship is similar enough to that of an employee to be inside IR35.
This can include how often someone is working, and how much control the client has over the day-to-day work of the contractor. Though there are a range of factors you can take into account, it is not a case of simply running off of a check list. However, the government’s Employment Status Manual is a good place to start.
The government advises that contracts must be assessed individually. Clients must not apply a ‘blanket’ determination for all their contractors as either ‘inside’ or ‘outside’ the off-payroll IR35 rules. This is outlined as part of your duty as an employer to take ‘reasonable care’ and is set out in detail on the GOV.UK website.
Government information and guidance as to how this determination is reached can be found by going to the links at the end of this article.
EXAMPLE FROM GOV.UK
“For example, if you work predominantly for the same client, at their premises and following their policies and procedures, you cannot send a substitute to work on your behalf and would require permission to seek additional work elsewhere, then you are more likely to resemble an employee.”
Government information and guidance as to how this determination is reached can be found by going to the links at the end of this article.
I AM AN AGENCY – WHAT DO I DO?
If you are an agency employing contractors on a client’s behalf it will be your job to pass on relevant SDSs to contractors. You may also be the fee payer, which will mean you will have to deduct NICs and Income Tax from their pay.
With only a few short weeks until the changes come in, now is the time to get as good an understanding as possible of which clients and which roles might be affected.
I AM A CONTRACTOR – WHAT DO I DO?
The changes do not necessarily mean that if you are inside IR35 (even though you will pay tax like an employee) you will receive at work rights like an employee, for instance holiday and sick pay.
It is also important that assessments are made per contract, meaning that you may be deemed ‘inside’ by one client and ‘outside’ IR35 by another, at the same time. It is also important to remember that you will still have to file an annual tax return.
HMRC has indicated it will only enquire into compliance of new cases, instead of targeting arrangements which applied before 6 April.
WHERE CAN I FIND MORE INFORMATION?
This is a complex area, and as with many new regulations, can take time to get used to. It is important that you are aware of the changes being made and what you can do. Keeping up-to-date records is important, and good business practice.
The government has an online tool called ‘Check Employment Status for Tax’ (CEST) which can be found on the HMRC website. This may help you assess the status of each contract.
You can check if you meet the criteria for a ‘small company’ here.
FOR MORE INFORMATION
Published On: 25/03/2021 17:00:19
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