The IR35 tax regulations are changing for contractors in the UK from April 2021, bringing the private sector in line with the public sector. In this week’s blog, we’re explaining everything you need to know about how the IR35 amendments could affect your contractor status and pay, and what you can do to minimise the impact on your future assignments.
What is IR35?
IR35 is tax legislation that covers contractors who supply their services through an intermediary (e.g. their own company) to ensure they pay the correct tax and National Insurance Contributions (NICs). You may have heard it referred to as the off-payroll working rules.
The legislation was introduced to tackle “disguised employment,” where someone claims the tax benefits of contracting through an intermediary when, in practice, they are an employee.
If you are deemed to fall “outside IR35”, you are considered a genuine business and can pay yourself a salary and draw the remainder of income as dividends.
If you are deemed to fall “inside IR35”, you are considered an employee of your end client for tax purposes, and subject to tax and NICs.
How is IR35 changing in April 2021?
IR35 itself isn’t changing and will continue ensuring workers are paying the correct tax and NIC. However, the responsibility for determining IR35 status is shifting from the contractor to the end-user.
From April 2021, all medium and large-sized private businesses will join the public sector in becoming responsible for determining whether your contract falls inside IR35 and for paying the appropriate tax and NICs if it does.
For the purposes of IR35, a medium and large-sized private business is one that:
Has a turnover of more than £10.2 million;
Has a balance sheet of more than £5.1 million; or
Has more than 51 employees.
As part of this responsibility, your end client will begin issuing Status Determination Statements (SDS) outlining their assessment of your worker status. The SDS will also include details on how to appeal their decision.
How will end clients assess your IR35 status?
While there is no clear-cut test for determining your status under IR35, the following case law factors will be considered:
Financial risk - whether you are undertaking financial risk to deliver the project.
Behaviour - if you behave as an employee, for example, using the end user’s equipment and following their holiday rota.
MoO - if there is an obligation on you to work and your end client to make work available.
Substitution - whether you must carry out work yourself or can send a substitute.
Supervision - if you are heavily supervised or free to get on with your work.
Direction - whether you are given instructions, guidance or advice on how work is completed.
Control - how much control you have over your work.
Your end-user might also use HMRC’s Check Employment Status of Tax (CEST) tool to assist.
What do the IR35 changes mean for contractors?
Essentially, from April 2021, you are no longer responsible for determining your work status when contracting with medium and large-sized end-users.
The consequences of this shift in responsibility could be small or could be considerable. On the one hand, end-users may feel confident using the CEST and insurance backed tools to confirm your worker status and pay you accordingly. On the other hand, the end-user may reduce their risk by implementing blanket bans or assessments of contracts, just like HSBC and Barclays have done.
While we wait to see the long-term effects of the IR35 changes, you can prepare for the changes and protect your position by:
Finding an FCSA-accredited umbrella company to use should your assignment be classified as falling within IR35.
Partnering with a recruitment consultancy that sources contracts falling inside IR35.
If you’d like to learn more about IR35 and the implications on your contract, get in touch with our specialist team today.