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IR35 - how will this affect you?

IR35 – what is it?

In April 2021 the government is introducing changes to IR35 legislation. This has been delayed a year, because of the pandemic.

IR35, or off-payroll working rules, were introduced in 2000. The rules are intended to ensure that contractors working through an ‘intermediary’ – usually a personal service company – pay broadly the same income tax and National Insurance Contributions (NIC) as an equivalent employee.

An intermediary will usually be the worker’s own personal service company, but could also be any of the following:

  • a partnership

  • a personal service company

  • an individual

HMRC believe that a large proportion of private sector contractors, potentially are in fact ‘disguised employees’. These individuals are incorrectly describing themselves as ‘self-employed’.

Self-employed individuals and employees are treated differently for income tax and NIC, with some significant differences in the contributions made.

HMRC want to ensure that where there are individuals working side by side in the same (or similar) roles to a self-employed contractor they are treated equally in regard to tax and NI liabilities.

IR35 rules have been in existence since 2017 in the public sector, and from 6th April 2021, these changes will be extended to the private sector.

The changes impact medium and large-sized private sector businesses, who will be responsible for determining the employment status of a contractor’s assignment, deducting any employment taxes due and paying any tax owed to HMRC.

Will the changes apply to all businesses?

No. Small businesses are exempt from the changes. These businesses are defined as meeting two or more of the following criteria:

  • Annual turnover is under £10.2 million

  • Balance sheet total is under £5.1 million

  • Under 50 employees

If the new rules apply the end user client will be responsible for determining if the work is within IR35 and will be responsible for notifying the person making the payment to the worker. They will also have to explain to the worker why they believe IR35 applies.

What should I do now?

If you fall within the definition of ‘small’ then you don’t need to make any changes, provided you meet the definition of small in any tax year.

If you are considered a medium or large organisation, please contact me for further information on what you should be reviewing before the changes are implemented.

We are a small business, so do we need to do anything?

Not in relation to IR35.

IR35 seeks to identify one person small businesses and apply a set of tests to determine if that individual is an employee, and should be subject to the same tax and NIC treatment as an employee.

It’s worth remembering that regardless of the written contract in place an external organisation can, and will, review the actual working nature of the working relationship, if this is challenged. With IR35 HMRC are looking at the tax and NIC treatment, but if a claim is made to an Employment Tribunal, the Tribunal will review the actual working relationship, rather than any documents or agreements that might be in place.

It is always good practice to review any self-employed contractor arrangements to ensure that the nature of the relationship is a true contractor arrangement.

If you require any advice on the status of a worker, employee or a self-employed contractor, or want to discuss a particular situation, please get in touch.

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