What is IR35?
IR35 is another name for the off-payroll working rules. It is designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax.
Contractors who work through their limited company enjoy a level of tax efficiency. While they don’t usually get employee benefits (like holiday and sick pay), they have flexibility and control over their work.
Some contractors and their clients try to take advantage of this tax efficiency by working as if they are self-employed, when for all intents and purposes they are employees. HMRC has designed the off-payroll working rules to tackle this.
This time last year companies and contractors were preparing for the shift however life as we know it changed around the 17th March and we were faced with the start of a worldwide pandemic which has seen the loss of loved ones, devastating effects on the UK economy, adjusting to working from home, homeschooling and let’s not forget some amazing zoom blunders from colleagues!
IR35 was put on hold and everyone breathed a sigh of relief… Some were hopeful it would be forgotten… sadly not! It’s back on!
April 2021. What do the IR35 changes mean?
In April 2021, there will be an IR35 private sector update that will align public and private sector IR35 rules.
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 National Insurance due where IR35 was applicable.
The rules then changed in 2017 so that, in the public sector, the responsibility for ensuring IR35 is correctly implemented shifted from the contractor to the public sector body engaging them. Responsibility remained with the contractor in the private sector.
When the IR35 changes take place in April 2021, 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 the ‘engaging’ businesses will be held liable should HMRC decide the status has been incorrectly assessed.
The IR35 changes in the private sector excludes ‘small’ businesses, meaning that contractors working for them will continue setting their own IR35 status.
A business will be considered “small” if it satisfies two or more of the following criteria:
- It has an annual turnover not exciding £10.2m.
- It has a balance sheet total not more than £5.1m.
- It had an average of no more than 50 employees for the company’s financial year.
Inside or Outside of IR35 – What does this mean?
A role will often be referred to as inside or outside of IR35 – here’s the difference:
- If the role is ‘inside IR35’, it points towards employment and the contractor cannot work through their limited company. They must either go on payroll or work through an umbrella company.
- If role is ‘outside IR35’, it points towards self-employment, and contractors can continue to work through limited companies.
What are the key factors that determine the IR35 status of a role?
With the responsibility shifting to the hiring business to determine the status of a role; there are three key factors that HMRC will look at first to determine if the role falls inside or outside of IR35.
Please note these are not the only factors but lets’ start with the three main areas first – these are the basis of the process to determine the status of a role:
Supervision, Direction and Control: Is the contractor constantly supervised, do you instruct how the job is to be done, strict working hours, can the contractor work from home or at a place of their choice.
Substitution: Will you accept a substitute? The contractors may on occasion instruct someone else to carry out a portion of the work. It is the contractor’s responsibility to ensure the substitute has the correct skills and expertise to carry out the work. The substitute will be paid by the contractor.
Mutuality of obligation: An obligation for the client to offer work and if work is offered, an obligation for the other party to accept it.
There are so many other factors to keep in mind.
How will the contractor communicate with your clients/suppliers? Ideally the contractor would use their own email address but for security reasons it may be necessary for the contractor to use a company email address.
Company lunches and gym memberships will be a thing of the past for contractors – these are employee perks.
The contractor cannot have line-management responsibilities over the rest of the team – they cannot conduct appraisals, authorise holidays or be involved in disciplinary procedures. Likewise – they cannot be subject to appraisals either. Project management is perfectly acceptable and occasional progress reports are expected.
And so much more!
We have the full list – get in touch today and we can send you our “How to” guide.
The CEST tool
HMRC have provided an online tool (CEST) to determine if the role being recruited for falls inside or outside of IR35; it’s a great tool however it does have some serious drawbacks.
The determination of a role is not black and white – HMRC have a habit of doing this and it’s almost as if they are giving us all just enough rope so we can hang ourselves!
First of all they stipulate you have to take “reasonable care” when determining the status of a role. Not a single person I’ve spoken to about IR35 likes the term “reasonable care” for a legislation enforced by HMRC that could potentially fine you extortionate amounts of hard earned cash and also possible prison time!
You could complete the CEST “test” and the status of that role falls inside of IR35 – this would then mean that the contractor cannot work for you via his own limited company and would either need to go on payroll as a full-time employee or work through an umbrella company.
The big problem is when the tool determines the role is outside of IR35 – the contractor works through his limited company: he’s happy – you’re happy. If the status was incorrect or you ticked the wrong box to arrive at the outside status then you will be fined.
HMRC have announced that at first there will be no fines. Whilst this is great and oh so kind of them while we all figure out how to determine the status of new roles and learn to apply “reasonable care” – It won’t be forever.
IR35 is a complex new tax law that needs to be complied to by the 6th April deadline and going forward!
We are working with Brookson One and can help with the determination of your roles. Our solution combines the best technology with expert support and with 100% compliance, assurance and insurance, the IR35 stress can be reduced!
Book a consultation with our representative who can provide you with the support you need on +4420 3800 1234 or email@example.com