The government is introducing changes to IR35 legislation in April 2021. This is a year later than planned, due to the COVID19. So - what do contractors need to do to ensure they are ready for the new rules?
What is IR35?
If you are not already aware of IR35, let's familiarise ourselves. This is not a new tax: the off-payroll working rules were first introduced in 2000.
The original IR35 press release was called 'Inland Revenue budget press release number 35' - hence the shortened 'IR35'
The rules exist to ensure that contractors working through an 'intermediary' (i.e. a limited company) pay roughly the same income tax and National Insurance Contributions (NIC) as an equivalent employee.
HMRC has stated that it wants to ensure a level playing field. Ideally, you would never have two individuals doing similar work who are being taxed very differently.
When do the IR35 rules apply?
HMRC says that the rules apply "if a worker provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly.”
In simpler terms, if the following apply to a contractor’s assignment, then they will need to consider IR35 rules:
The contractor personally performs the work for a client
An ‘intermediary’ is used (such as the contractor's own limited company or recruitment agency) which means the worker is not contracted directly to the client
Note: The rules do not apply to sole traders
If the worker was contracted directly to the client, HMRC would regard them as an employee of the client for tax purposes
Before April 2017, contractors operating via their own limited company were responsible for their IR35. This meant determining whether an assignment was inside or outside IR35 rules, as well as paying any employment taxes due.
But during 2017, these rules changed for the public sector. This meant that organisations including:
- government departments,
- local authorities,
- and NHS hospitals
became responsible for assessing the employment status of their contractors and paying any employment taxes due
HMRC are hosting a number of webinars for those who would like to learn more about the incoming IR35 regulation changes. You can sign up for these here.
What is changing in April 2021?
On 6th April 2021, the changes made in 2017 to the public sector are extending to apply to the private sector. This means that medium and large private sector businesses will be responsible for determining the employment status of a contractor's assignment. They will need to deduct any employment taxes due and pay any tax owed to HMRC.
Small business exemption to the new IR35 rules
There’s an exemption for end-clients* who are small businesses. * The term “end-client” refers to the entity receiving the service which the contractor personally provides To qualify as a small business, you must meet two or more of the following criteria:
Annual turnover is under £10.2 million
Balance sheet total is under £5.1 million
Less than 50 employees
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the contractor and the changes do not apply.
Status Determination Statements (SDS)
One important new element is that the end-client must confirm the IR35 status of a project. They do so by providing a ‘Status Determination Statement’ (SDS) to the contract worker. If an agency is involved in the process, it must also receive a copy of the relevant SDS.
Why do contractors want to be outside of IR35?
There are many reasons why contractors aim to remain outside of IR35. They may want to stay contracting to enjoy the freedom of choosing their own projects. Contracting can also mean they can work with multiple clients and not tie themselves to a single client for regular work.
Contractors operating via their own limited companies can enjoy the lower taxes involved in taking income from their companies.They pay themselves via a combination of a tax-efficient salary and dividends.
Also, being inside IR35 for a project may result in less take-home pay. Due to the higher employment taxes within IR35, a contractor would have to increase their rates to match their take-home pay.
Key factors affecting your IR35 status
To evidence that your project is outside IR35, you need to ensure your contract and your working practices show you operate independently.
The three key principles that determine your assignment’s IR35 status are:
1. Supervision, Direction and Control
This considers the degree of supervision, direction and control your client has over what, how, when, and where you complete your day-to-day work.
If your client dictates how you work, the hours you must work, or where you perform your work, then it’s likely that your assignment is inside IR35.
How to avoid this: Agreeing on a clear set of project deliverables for the duration of the assignment. Ensure your contract states the services your company (not you personally!) will provide.
This examines whether you must carry out the work yourself and whether you can send a substitute to perform your work.
How to avoid this: Your contract with the client should be in the name of your limited company. It should also contain a clause allowing your company to send a substitute.
3. Mutuality of obligation
This looks at whether your client is obliged to offer you work and whether you are obliged to accept any work they offer to you.
How to avoid this: Mutuality of obligation is often difficult to evidence one way or another. All projects will have a minimum expectation of work and when the client is due to pay for it.
To avoid this, you would need to remove any long notice periods or termination clauses in your contract. These would indicate an obligation on the part of the client to provide you with work, and your part, to deliver that work.
Other factors affecting your IR35 status
There are a range of other indicators about the IR35 status of an assignment. (Note: this list is not exhaustive and is constantly expanding.) If you are a contractor, you should not:
Be identified personally on a client’s internal list of employees
Wear an ID card with your name and the client’s name on it. You may have a pass or ID card but these will identify you as an independent contractor and state your company
Need to attend meetings about HR matters internal to your client
Be required to take part in any appraisal for yourself or any of your client’s employees
You shouldn’t be entitled to time off for sickness absence, or holidays, or to share options, or bonuses that are the same as your client’s employees'
How to prepare for the new IR35 rules
It’s essential you understand the approach that is being taken by your clients towards IR35.
Your clients may accept evidence from you about your contracted status. This may help to inform the SDS they produce. Some clear indicators you are not an employee include:
Having your own company website and business email address
Holding appropriate small business insurance
Being VAT registered
Having business cards, marketing brochures, flyers, etc. for your business
Using your own equipment on projects
Having your own business address/office (even if it’s at your home).
You should ensure your marketing materials promote your business and not you personally.
What if your client determines you are inside IR35?
If your project is deemed to be inside IR35, after April 2021 your client will be responsible for deducting the necessary income tax and NIC and paying this over to HMRC. They must also provide you with a Status Determination Statement (SDS) that confirms the assignment is inside IR35. This means that your take-home pay will be reduced unless you have negotiated a higher contract rate.
IR35 status is based on each individual assignment.
This means that if you’re working on multiple projects, some of which are inside IR35 and some outside, then you need to make sure you have the right accounting processes in place.
How Pink can help your contractor business
It is vital that your contractor business is prepared for the new IR35 rules as early as possible.
Pink have been supporting contractors for over 10 years, and have a wealth of tax experience within the team. If you need support in taking your next steps, or advice on how to manage these changes, please get in touch with our team.