As we blogged back in February 2020, changes to the IR35 process were due to be introduced in April last year. Then the pandemic struck. As a result, these reforms to off-payroll working rules got postponed to 6th April 2021. Now we’re only a few weeks away from the IR35 changes, it’s a good time to recap what they are – and whether you will be affected.
What is IR35?
IR35 rules can apply if a worker provides services to a client via an ‘intermediary’. This intermediary is normally a worker’s own personal service company, but it could also be a partnership, an individual or another personal service company.
The IR35 rules apply if a worker who supplies services is – to all intents and purposes – an employee, except for the fact that they are paid via an intermediary. If someone is deemed to be a ‘disguised employee’ under IR35 rules, then the contractor has to pay income tax and NICs on the contracting fee.
How IR35 status is determined
This is where things get complex. To determine whether a worker is an independent service provider or a ‘disguised employee’, you have to consider a number of criteria. These include:
- Substitution. Could the worker send someone else to carry out the agreed work (taking into account factors such as qualification and vetting procedures)?
- Working arrangements. How much control does a worker have over the work they do? Does the contracting business have significant direction control over how, when and where someone completes their work?
- Mutual obligation. Does the contracting business have an obligation to offer work? Does the worker have an obligation to accept it?
- Financial risk. Does the worker pay up-front for material costs?
To determine whether IR35 rules apply to you – whether you are a worker or a contractor – it’s a good idea to speak to a specialist. However, the government also offers on online tool that helps you work out the IR35 status of workers, based on their circumstances and working arrangements.
What are April’s IR35 changes?
April’s changes apply to larger employers in the private sector. They bring IR35 rules into line with those that already apply to the public sector.
Essentially, the responsibility for setting IR35 status and paying relevant tax shifts from contractors to the businesses that employ them. The end client has to provide a ‘Status Determination Statement’ (SDS) that confirms the IR35 status of each contract. If a contractor is hired via an agency, a copy of the SDS must be given to the agency as well as the contractor.
The key point of this change is that HMRC can recover tax liabilities from the highest party in a supply chain, regardless of which party in the supply chain is not complying.
Are small businesses exempt?
Yes. If your business meets two or more of the following criteria, it is exempt from the IR35 changes and your contractors remain responsible for assessing the IR35 status of their assignments.
- Annual turnover under £10.2 million
- Balance sheet total under £5.1 million
- 50 employees or fewer
How can I prepare for the IR35 changes?
It’s important to prepare before the changes come into effect on 6th April. You may want to revisit the way you employ contractors, ensuring they fall outside the scope of IR35. Alternatively, you will need to make new payroll arrangements to ensure correct payment of income tax and national insurance.
If you are a THP client, get in touch today to discuss ways of preparing for the IR35 changes.
About Karen Jones
Having worked for one of the world’s largest accountancy firms, Karen Jones uses her tax knowledge and skills to help clients obtain substantial reductions to their tax liabilities.
With an expanding portfolio of tax clients, Karen enjoys the variety her work brings her and particularly likes working with new businesses and people. With a growing number of tax clients, she frequently faces a variety of challenges and relishes the experience she gains as she solves them.
Karen likes the THP ethos: “I like the way the team has a professional, but friendly and down-to-earth approach – it creates a productive atmosphere that benefits everyone.”
Karen’s specialist skills:
- Personal Taxation
- Tax Efficient Planning
- Trust Administration