If you are a contractor in the UK, you have probably heard about the IR35 changes that HMRC are planning to introduce. This article will describe what the IR35 changes are, if your business will be affected, and how to proceed with the changes.
The IR35 changes were supposed to be introduced in April 2020, however, due to the COVID-19 pandemic, there will be a 1 year delay in the changes until April 2021.
The IR35 rules are currently different in the public and private sectors, and your tax status can change from each project or contract you accept. It can be complicated to figure out if you are complying with the rules, so I’ve explained in depth what IR35 is, why it was introduced, how to determine if it applies to you, and the upcoming changes in 2021.
What is IR35?
IR35 is a legislation in the UK referring to anti-avoidance of tax. It is aimed towards certain industries to ensure that ‘disguised employees’ pay the same amount of tax as a normal employee would.
‘Disguised employees’ (also known as ‘deemed employees’) refers to workers who are employed on a temporary contract basis with your company rather than a permanent contract. If the worker is on a temporary contract, they may not be paying the correct income tax or National Insurance contributions that a permanent employee would, because they may receive their payments through an intermediary.
Disguised employees also refers to any self-employed or contractual employee who uses an intermediary to avoid paying tax.
IR35 is often referred to as ‘off-payroll working rules’. An off-payroll worker is described by HMRC as a worker who provides personal services to an end client via their own company, but would otherwise be an employee of the end client if they were providing their services directly to the end client.
Why was IR35 introduced?
IR35 legislation was introduced to ensure that contractual workers are paying the correct amount of income tax and national insurance payments.
The law was introduced by HMRC in April 2000 as self employed workers, and businesses that hire contractors, were using intermediaries to avoid paying the correct amount of tax.
In 2017, there were some changes to the rules to ensure more widespread compliance. These changes were made to the public sector only, and now, in 2021, similar changes are being made to the private sector which will be explained below.
Does IR35 apply to me?
If you are a contractor who uses an intermediary, but would otherwise be an employee if providing direct services to a company, then IR35 will affect you.
The intermediary could be a limited company, a partnership, another person, or a PSC (personal service company).
Here is an example scenario of someone who falls within the IR35 rules:
A contractor who is employed on a 12 month contract by a company. He uses the company’s tools and equipment, works full time at the site, is told what to do by the company, has to request time off, and is billed by the hour. He owns a limited company but is essentially employed on a contractual basis by the company using his services.
Here is an example scenario of someone who does not fall within the IR35 rules:
A contractor owns a limited company and is hired by a client to complete a project. The contractor sets his own hours, and timeline and uses his own equipment. He can also send a substitute if unable to work. This is a one-off job and he does not plan on continuing to work with the company once the task is completed.
There are 3 main factors that can help you understand if your contract is within or outside of the IR35 rules. They are:
- Supervision and control: If your client has the majority of control and supervision of your day to day work, then the contract is within IR35 rules. If they tell you what, how, when and where to work, then you will have to oblige to the IR35 rules.
- Substitution: If you have to carry out the work yourself, and request time off if needed, then you are within the IR35 rules. If you can send another person or substitute to do the work for you then you may be outside of the IR35 rules.
- Obligation: If you are a contractor who is working only for a specific contract, with no obligation to continue working for the client after the completed task, then you fall within IR35 rules. Alternatively, an employee is expected to continue working for the client even after the project has been completed, and therefore falls outside of the IR35 rules.
Other factors such as how you receive payment, whose equipment you use to complete the task, the premises you work at, and contract termination can also be used to determine if you fall within the scope of IR35 regulations.
If you are a contractor, each job you take can be different in terms of IR35 rules. This means that depending on each contract you accept, your tax situation can change with it.
If you are unsure if IR35 applies to you or your company, you can use a tool on the UK Government website to check employment status for tax purposes.
What are the IR35 changes in April 2021?
The IR35 changes were supposed to take effect in April 2020, however, due to the coronavirus, the changes won’t be implemented until April 2021.
These changes will shift responsibility from private sector contractors, to the companies that hire them to ensure they comply with the IR35 rules. Therefore, if you are a private contractor, and hired by a company for a task, it is up to the company to inform you if you are within IR35 regulations.
If they do not tell you and you violate the IR35 policy, or are not paying the correct tax, the fine will then go to the company who hired you.
These changes are only for large and medium sized companies who hire contractors, small companies are exempt from the changes. Any company with over 50 employees or making over £10.2m annual turnover is considered a medium or large company and will be responsible for the tax status of the contractors they hire.
This change will bring private sector IR35 in line with the public sector IR35 making the process simpler to understand for everyone.
You’re probably wondering if the company will increase your pay or rate to cover the additional tax. There is no policy in place for this, it is up to the company who hires you.
What do I do if IR35 applies to me?
If HMRC investigates your contract or company, and you are found violating the IR35 rules, then you will potentially have to pay back-dated income tax, national insurance, and a fine. Therefore, it is extremely important to be complying with IR35.
With the upcoming changes in April 2021, the hiring company (small businesses excluded) will be liable if they do not ensure the contractor is paid the correct amount minus the income tax and NI.
Therefore, if you are currently a contractor in the private sector, it is very important to understand the rules and comply with them in order to not get a fine. If your contract is within the IR35 rules, you will need to ensure that you are paying the correct income tax and national insurance and report it to HMRC until the changes take effect.
In 2021, if you are a medium or large sized business in the private sector hiring contractors, you will need to follow certain steps as the changes will put the responsibility on you to ensure the contractors are paying the correct tax, and that you are reporting it to HMRC.
If you qualify as a medium or large business affected by the changes, when you hire a contractor, you will need to let them know that they fall within IR35, and when calculating their payment, calculate the correct income tax and NI and report it to HMRC.
You can read the rules and find more information on the UK Government website.
Does IR35 affect CIS?
The Construction Industry Scheme is a scheme created by HMRC depicting how subcontractors within the construction industry should be paid. Like IR35, it was created to decrease the possibility of tax evasion.
CIS is a completely different scheme to IR35. Workers in the construction industry have thought that CIS is a way to avoid IR35 rules, however, IR35 will take priority over the construction industry scheme according to HMRC.
If you are a CIS worker, you will still have to look into the IR35 rules, and if your contract or employment falls within the rules, you will have to ensure that you are paying the correct income tax and national insurance.
Therefore, CIS registered workers are indeed affected by IR35, and the changes coming to the private sector in 2021 will have to be followed.