Changes are coming in April 2021 with regards to off-payroll working rules, otherwise known as IR35. If you are a contractor, chances are these changes will mean you need to make some changes in order to be compliant.
What is IR35?
Introduced in April 2000, IR35 is a tax legislation that was created to combat tax avoidance. Its purpose is to make sure that contractors are not disguising employment to avoid paying the correct tax. It does this by ensuring that workers, who would be an employee if they were providing their services directly to a client, pay roughly the same income tax and National Insurance contributions as employees.
Before 2017, contractors operating through a Personal Service Company (PSC) were responsible for deciding if work fell within the IR35 rules and pay the employment tax accordingly. But in 2017, that changed for the public sector, which meant that government and local authorities would assume the responsibility for assessing employment status and pay the taxes instead of contractors.
What are the IR35 changes coming in April 2021?
As of April 6th, 2021, private sector companies will now be responsible for determining the employment status of a contractor’s assignment and will need to deduct any employment taxes due and remit taxes owed to HMRC.
This means as a contractor, it will now be up to your clients to decide if a contract falls inside or outside IR35 rules and if PAYE tax and NIC will need to be deducted. The “private sector” also includes third-sector organisations, so if you work for a charity, these changes may impact you and your client.
At this point, the client must issue your PSC or employment agency with a written “Status Determination Statement” which will clarify the IR35 status of the contract. In addition to this, the 5% administration allowance will be removed from contracts that fall within IR35, because the burden of responsibility now falls with the client and not the Personal Service Company.
It is important to note that these changes are not an introduction of a new tax liability. They an extension to the public sector rules that were introduced in 2017 to further increase compliance. Government reporting of non-compliance estimates that only 10% of PSCs that should be applying are actually doing so, so the new changes aim to address this issue.
Small business exemption
There is an exemption if your client meets the definition of “small business” defined by the Companies Act of 2006. In order to qualify as a small business, your client must meet two or more of the following criteria:
- Less than 50 employees
- Balance sheet less than £5.1m
- Annual turnover of less than £10.2m
If they qualify as small, they won’t be affected by the changes, and the responsibility of determining the IR35 status will remain with the contractor. In this instance, the 5% administration allowance is allowed. However, this exemption does not apply to the public sector, even if the entity is considered small.
Does IR35 apply to limited companies?
IR35 will affect you as a contractor if you work for your own limited company. If you work through an umbrella company – which is a limited company that employs contractors and acts as a third-party supplier between the client and contractor – you will not need to worry about IR35 as you are already paid through the PAYE system.
IR35 also doesn’t apply to sole traders, but rules for determining employment status do. What this means is that if a contractor is registered as self-employed but is found to be working as an employee, the responsibility of paying for any additional tax due will fall to the end client. While the contractor holds no liability for their employment status, they may still experience a deduction in earnings as they have to be placed on the company’s payroll.
If you are a contractor working through a limited company, it is your responsibility to understand how the legislation works and act accordingly. This means you must meet HMRC’s definition of self-employment by making sure you are not managed by anyone client-side, your work is project-based, you haven’t offered exclusivity to any clients and you have contracts that are linked to the completion of services rather than a continuous relationship.
If your contract is deemed to be inside IR35, it is possible to continue working through a limited company – your client will just have to deduct the income tax and NIC for the contract. If you want to assess the impact the legislation has on your net income, you can use the following IR35 calculator.
Below is a non-exhaustive checklist containing some factors that can help indicate if you are inside or outside of IR35 – but if you are unsure, you should also consider getting detailed advice on your IR35 status. This would include a review of both your day to day working practices and your service contracts.
- You carry out all of your company’s contracted work personally
- You are closely supervised by somebody in your client’s business
- You work for one long-term client
- A client supplies you with the equipment to work at their premises
- You are being paid on a time basis
- You don’t have your own business identity
- You work for your own limited company and do not receive employment benefits such as paid leave or sick pay
- You are being paid at a fixed price or on a paid project basis
- You supply your own equipment and may work from your own premises
- You have your own insurance, branding and premises
- You can decide how and when you work, and send a substitute to do the job if you please
- You can work with more than one client at one time or on short successive projects with an array of clients
With the changes coming into effect on the 6th April 2021, there is still time to ensure you are compliant with the rule changes, but it is better to act sooner rather than later! If you have any questions about how IR35 may impact you, feel free to contact us.