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IR35: what you need to know!

Posted date 21 days ago Posted by Staffline Team

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Since 2017, public sector organisations have been required to ensure that any contractor hired by them fall within the appropriate IR35 status – however, have delayed introduction of the new rules last year, IR35 rules will extend to affect contractors or workers who provide services to medium or large private sector businesses as of 6th April 2021.

Taxation changes are not the easiest of matters to understand for those of us who are not tax experts; and IR35 related terms such as ‘off payroll working’ can cause more confusion. Therefore it’s important to highlight the key points that medium/large private sector businesses need to be aware of to avoid falling foul of HMRC financial penalties later.


If your private sector business meets two or more of the criteria below, it will be deemed a small private sector business for the purposes of HMRC and IR35 rules will not be applicable:

  • Annual turnover is no more than £10.2 million;
  • A total of fixed and current assets (before deducting current liabilities, long-term liabilities and deferred tax provisions) over £5.1 million; or
  • No more than 50 employees.

However other exemptions may apply based on how new your business is; whether it’s part of a group business, etc - as always with taxation matters, if you are unsure regarding this or any of the actions you need to take to comply with the new rules; you should approach a tax expert for advice.


What is IR35?

The new IR35 rules are intended to ensure that self-employed status cannot be used to pay less Income Tax and National Insurance where a contractor, or worker, would otherwise have been deemed to fall under employee status (what the HMRC term a ‘disguised employee’).. This can sometimes be the case where the contractor provides a service to a client through an intermediary:

  • via their own limited company or personal service company;
  • via a partnership or even an individual

Contractors working full or part time through intermediaries such as above may fall under ‘off-payroll working rules’; or IR35 tax rules.

The rules are not likely to affect genuinely self-employed freelancers; and should not apply to self employed individuals who work under an umbrella, but bear in mind that employment status does not wholly rely upon what’s stated in a contract – more about that later.

 

Who is affected by IR35 rules?

The rules will affect:

  • clients who receive services from workers through an intermediary
  • agencies who provide worker services through an intermediary (including employment agencies)
  • workers who provide their services through an intermediary and would otherwise be classed as an employee if they provided their services to the client directly

 

What do businesses need to do?

  • It is the responsibility of clients who engage contractor services to identify whether they have contractors/workers who will provide service through an intermediary after 6th April 2021.
  • Assess whether off-payroll working rules will apply to each contractor before 6th April 2021. You may need to liaise with the contractor to obtain some details in order to do this, however the HMRC have provided a useful online assessment tool at HMRC CEST Checker.
  • Use a Status Determination Statement to inform the contractor/worker and their intermediary of the assessment outcome. Have a dispute process in place to review disputes should your outcome be challenged (this is a legal requirement).
  • Ensure that adequate processes are in place to deduct correct National Insurance; or pay employer National Insurance; Income Tax and Apprenticeship Levy (if this applies).

 

Some final action points:

  • Be prepared to carry out a status assessment each time a new contractor/worker contract is created; renewed or is changed in any way. Think of it like a risk assessment for contractor status – it’s best to review your assessment when anything changes; or just regularly for your own peace of mind.
  • The content of a contract can be useful when completing your assessment – however beware of solely relying upon contractual content. Tribunals and Court decisions, not least the recent Uber decision, have emphasised that what happens in practice is just as, if not more, important in terms of determining employment status. Therefore consider each contractual clause with a critical eye and question whether the express statements, such as a right of substitution, can and do happen in practice.
 

Full, current guidance is available on the HMRC website at HMRC Guidance - Understanding IR35 and via their IR35 telephone helpline at 0300 123 2326.