This month, the new IR35 changes will come into force throughout the UK, changing the way some self-employed workers pay tax.

What is IR35?

IR35 was introduced in 2000 to combat the problem of ‘disguised employment’. Also known as the ‘Intermediaries Legislation’, it applies to contractors or a Personal Service Company (PSC) who provide services to a client through an intermediary, such as a limited company, but who would be seen as an employee if the intermediary was not used. In this case, contractors are considered an employee of their client. Those that IR35 applies to must pay income tax and National Insurance Contributions (NICs) as though they are employed, to avoid the issue of tax avoidance. The client is therefore responsible for determining whether the off-payroll rules apply.

Public Sector Contracts

In 2017, IR35 was introduced with regards to contractors working within the public sector. Clients of the contractor are responsible for determining the employment status of the contractor and adding them to their payroll accordingly. It is their responsibility to inform the contractor of their determination.

Private Sector Contracts

The contractor or intermediary establishes their own employment status.

IR35 and the new Off-Payroll Rules

From April 2021, changes will be made to IR35 for contractors working within the private sector. According to HRMC:

  • Contractors will have their employment status determined by medium and large-sized businesses. Responsibility for working out if IR35 applies is with the client.
  • Contractors working for small clients will be able to work out their own employment status (clients are considered as ‘small’ if their annual turnover is no more than £10.2 million, have a balance sheet total under £5.1 million as well as under 50 employees).
  • If the client is overseas (no UK connection or presence), the contractor will be responsible for determining the IR35 status.
Preparation and responsibilities of the new IR35 rules as a client according to HMRC:
  1. Look and assess the current workforce- Who is supplying services through a limited company?- Confirm the size of the organisation.
  2. Talk to agencies and contractors you work with- Ensure all parties understand and are familiar with the new rules.
  3. Determine if the off-payroll working arrangements apply- Understand if the new rules apply for any contracts beginning at the start of the tax year 2021. (i.e., inside or outside IR35)- Who should be responsible for employment status determination?- Use a Status Determination Statement (SDS) to communicate decisions to all parties.- Provide reasoning for determination.
  4. Making the correct tax payments- Includes relevant tax and NICs.