In less than a month, new IR35 tax changes will come into force in the private sector, meaning some self-employed workers – and the businesses that hire them – will have to pay tax differently. Here, we explain what the IR35 rules are, and who may be affected by the changes starting from April 2021.
What is IR35?
IR35 refers to the off-payroll working rules that aim to ensure that contractors doing work for companies, and the companies themselves, are paying the correct level of National Insurance contributions (NICs).
HMRC believes that thousands of people employed via a Personal Services Company (PSC) or another intermediary have been paying incorrect taxes; they should actually be paying the same amount of tax as fully employed workers, rather than self-employed workers.
You’re deemed to fall within IR35 rules if you would be considered an employee of a company if the PSC wasn’t in place. If you’re not sure whether you, or someone you employ, would fall inside IR35, there are three ‘tests’ you can use to check:
1. Who has control over how the work is completed?
If the company dictates your working hours and/or the location of where the work has to take place, you may be inside IR35.
2. Is there a mutuality of obligations?
If the company is obliged to give the worker more work once they’ve finished a task, they may be inside IR35.
3. Do you personally have to complete the work you do?
To be outside of IR35 there should be a substitute clause in your contract, and you should be in charge of that substitute. It is down to the company hiring the individual to assess whether they fall inside or outside of the IR35 rules, and could face ramifications if it gets it wrong. The measures have proved to be controversial. A consultation that ran between 5 March and 29 May 2019 found that affected contractors could stand to lose up to 20% of their income as a result of the changes.
What will change from April 2021?
From 6 April, all public sector authorities and medium and large-sized businesses in the private sector will be responsible for deciding whether IR35 rules apply. If a contractor provides services to a small private sector client, the worker’s intermediary will be responsible for deciding if the rules apply. The Treasury conducted a review into the IR35 rules in March 2020, announcing several changes that it hoped would help individuals and businesses prepare. These included:
Having a ‘light touch’ approach to enforcement:
During the first year of the rollout, HMRC has been told not to place penalties on anyone with inaccuracies relating to the IR35 rules, but anyone who deliberately fails to comply can be charged.
Not using information for new investigations:
HMRC won’t use any information submitted as a result of the changes to launch new investigations into PSCs for the tax years before 6 April 2021, unless there’s a reason to suspect fraud or criminal behaviour.
Making clients legally obligated to supply information:
The government will place a legal obligation on clients that means they must respond to requests for information about their size from agencies or workers, so they can gauge whether they’re dealing with a medium or large-sized organisation.
The IR35 changes will only apply to work carried out on or after 6 April 2021.
Who could be affected by the off-payroll working rules?
There are three main groups that are likely to be affected by the IR35 rollout in the private sector:
• Up to 170,000 individuals who are supplying services through an intermediary, such as a PSC, without which they would be fully employed
• Up to 60,000 medium and large private-sector organisations (with 50 or more employees), which hire workers via PSCs
• Around 20,000 recruitment agencies and other intermediaries which supply staff through PSCs.
Many contractors offer work to clients by setting up a PSC. The client hires the PSC, which in turn pays the contractor. In many cases, this is a perfectly legitimate way of working, but HMRC has identified thousands of workers and companies who it thinks should be paying the same rate of tax as employees.
You can find a range of resources on gov.uk with more details on how the IR35 rollout will work.
Working under an Umbrella Company
Many contractors choose to work through an umbrella company, who provide them with an employment contract allowing them normal employment benefits, effectively hiring them out to interested clients. The umbrella company then pays the contractor their salary after deducting PAYE contributions, and any other agreed costs.
Contractors generally are paid based on timesheet submission and the umbrella company will provide payslips, which can be useful for providing proof of employment and earnings for such things as getting finance or credit. This means it’s crucial to choose a reliable and compliant umbrella company – steer clear of those offering incentives like 95% take-home pay, or anything that seems to be too good to be true. The chances are that this is exactly the case and the appropriate contributions to HMRC aren’t being made on your behalf, or you are being told to claim for expenses you’re not entitled to – which could land you with a nasty and unexpected tax bill.
The most important things to look for are:
• An umbrella company which is transparent and upfront about things like their background and any associated fees or penalties that may be applicable to you as a contractor, for example if you terminate your contract early.
• An established company with a good brand identity and reputation.
• A good customer service and support team, who have a proven record of responsiveness when issues arise.
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