IR35 is a piece of legislation designed to counter tax avoidance. It is used to decide if contractors are actually contractors or are just disguised as an employee for tax purposes. This article will help you understand the IR35 legislation and provide tips on if it applies to you and how to be compliant.
Updated as of 18/03/2020:
New Rules set to come in to force from next month are set to be delayed until April 2021 due to the Coronavirus Crisis. Steve Barclay, the cheif secretary to the treasury said “I can also announce this evening, madam deputy speaker, that the government is postponing the reforms to the off-payroll working rules, IR35, from April 2020 to the 6th April 2021.
“Government will therefore not move the original resolution tonight, but will shortly table an additional resolution confirming that we will reintroduce the off-payroll working rule provisions by amending the bill, with a commencement date of 6th April 2021”.
It’s important to remember this is a deferral and not a cancellation so businesses should keep this in mind.
What is IR35?
In April 2000, HMRC introduced the IR35 legislation to stop people from taking advantage of the tax efficiency that comes with working through a limited company. Employers benefit by not having to pay national insurance or give contractors employee benefits. If you fall within IR35 you will face having to pay income tax and National insurance just like any other employee.
As of April 2020, IR35 will be replaced with the new Off-Payroll tax. This will mean the client will become responsible for assessing the contractor’s IR35 status rather than the contractor being responsible. The same tests will be applied to determine if the contractor falls under IR35.
When Does IR35 Apply?
HMRC says that the rules apply if contractors “would be an employee if there was not an intermediary”. In most cases, the intermediary is the contractor’s limited company. You can see our tips below to test if you meet employment status, you can use HMRC’s tool to help determine if you fall under IR35.
IR35 Compliance: What you can do
There are a number of things that you can do to avoid falling under IR35. It is important to maintain a certain level of distance from your clients so as not to look like an employee. Here are some examples of how to establish this distance:
- Avoid having to ask permission to take time off or receive holiday/sick pay. You should inform clients ahead of time that you will not be available and to plan for your absence. You should also not accept any payment for your time off.
- Do not let your client pay for your training. Your limited company should pay for this, not the client.
- Avoid using staff facilities when possible. You should use the visitors’ car park and sign in every day just like any other visitor would usually.
- Your contract should allow you to work with other clients at the same time.
- Your client should not instruct you on how to do your task and dictate your workload. In fact, your client should not control you in any way as this will make you look like an employee.
- Your contract should not personally name you.
We recommend that all contractors to have their contracts reviewed regularly to ensure they have the right contract between the intermediary/end clients.
New IR35 Rules: Off-Payroll Tax
As mentioned, the off-payroll tax comes into effect in April 2020. The big change is that clients and agencies will now have to assess contractors and make sure they are paying income tax and national insurance if they fall under the legislation. Previously, this responsibility lay with the contractor themselves. However, if a worker provides services to a small client in the private sector, the worker is still responsible for deciding if the rules apply.
Being self-employed has many benefits and it is important to understand IR35 and the new off-payroll tax in order to stay fully compliant. If you have any questions or issues surrounding IR35 or off-payroll tax, you should seek professional advice. Our friendly team are experienced in all things IR35 and will be happy to help, so don’t hesitate to get in touch.