If you run your own business, are self-employed or are a freelancer, then you will likely have heard of IR35. It is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name. The legislation has been in place since 2000, but is subject to constant changes.
The latest change was due to be the rollout to the private sector, as announced in the spring budget. However, this has now been postponed to April 2021 due to COVID-19.
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What is it?
The definition of IR35 is ‘off-payroll working through an intermediary’. It came into effect back in 2000, to stop workers from disguising themselves as contractors to pay less tax.
If a service provided by a contractor resembles full-time employment, the contractor falls under IR35 and should therefore pay tax like a full-time employee.
Who does it apply to?
There are three tests you can take to find out if IR35 applies to you or your workers. These are:
Control: does the client have control over when and where the contractor carries out the work?
Substitution: does the contractor have to carry out the work themselves, or can they send a substitute?
Mutuality of obligation: is the client obliged to offer work and is the contractor obliged to accept it?
If the contractor doesn’t have these freedoms, they fall under IR35 and are a ‘deemed employee’.
What does it mean for the private sector?
As it stands, on 6th April 2021, how the rules are applied will change. This will mean that medium-to-large private sector firms will now take over responsibility for determining whether the contractors they hire should be taxed in the same way as permanent employees (inside IR35) or as off-payroll workers (outside IR35). Previously, this was down to the contractors themselves.
How do I prepare for these changes?
If you’re a contractor - it’s important to be proactive, and assess whether you fall inside or outside of IR35. Seek out how you will be affected and what you can do next. If you think you may fall into the next steps of the legislation, make sure you correct any non-compliant behaviour, and demonstrate this to your clients.
If you’re an employer - carry out an audit of your current contractors to see where they fall. Once their position is established, make sure to communicate openly with them to reassure them and avoid confusion. Being clear and transparent will ensure all parties are on the same page.
Why is it controversial?
IR35 hasn’t been without its sticking points. Contractors are worried that this new legislation will cause their employers to unfairly group them inside IR35, which could reduce their pay.
Meanwhile, some employers are concerned about the extra administrative burden of IR35, and not being prepared enough for these new changes. The government has also come under fire, with experts claiming the new reforms will lead to less contractors being available. This could impact the economy, with UK businesses struggling to find the talent they need.
What does the deferral mean?
Some businesses have welcomed the deferral as it means they will have more time to get up to speed and prepare their workforce for the new IR35 changes. However, the delay means it is likely that there will be no 12-month soft landing period. Previously, this would have meant that businesses will not be charged penalties for the first year, except in cases of deliberate non-compliance. Now, this means that companies have a year to get it right, or risk facing fines.
Donna Torres is Director of SMB & Commercial Operations at Xero
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