IR35 has come into force from 6 April 2021. IR35 is anti-avoidance tax legislation designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax. Disguised employees refers to workers who receive payments from a client via an intermediary, for example, their own limited company, and whose relationship with their client is such that had they been paid directly they would be employees of the client. Contractors who work through their limited company enjoy a level of tax efficiency. While they don’t usually get employee benefits (like holiday and sick pay), they have flexibility and control over their work. Some contractors and their clients try to take advantage of this tax efficiency by working as if they’re self-employed, when in practical terms they function more like an employee.
Why IR35 Has Been Legislated
Previous to IR35 being introduced, workers who owned their own limited company could receive payments from a client directly to the company and to use the company revenue as would any small company. This means that profits could be distributed as dividends, which are not subject to National Insurance payments. Workers could also save tax by splitting ownership of the company with family members in order to place income in lower tax bands. This practice was even recommended within government advice about setting up family businesses. This was criticised and called out as tax fraud by other government departments including the Treasury. Professional advisors now do not recommend that family members are allocated shares in the company if they do not perform a significant role in the business, more than simply the bookkeeping for example. Put simply the IR35 rules aim to ensure that workers, who would normally be classed as direct employees of one company, pay the same income tax and national insurance contributions as their equivalent co-workers. IR35 was first announced in 2019, yet postponed for a year as part of the Government’s Coronavirus business support package. Now IR35 has come into force for freelancers and contractors in the private sector.
How IR35 Affects the Private Sector
Since IR35 has come into force, these reforms have forced changes in the employment status of millions of people who typically work via their own personal service companies (PSC) for tax reasons. The onus on determining whether a worker is a direct employee, known as “inside IR35” now falls to medium and large businesses, which has caused disputes in some cases. The reforms have serious consequences for many operators, service providers, labour providers and contractors. Despite the 12 month delay, it has still occurred during an economically volatile time, when many businesses who are feeling the effect, can least afford the upheaval. IR35 has been met with speculation from the financial sector, some arguing that it will hit some businesses very hard, whereas others may experience a “levelling-up” effect, depending on the businesses and its professional relationships. Either way April represents a milestone now that IR35 has come into force. Prestige Business Management can help businesses and contractors navigate the system and protect themselves.
IR35 Causing Problems
IR35 has come into force despite criticism from a House of Lords enquiry into HMRC’s “handling” of IR35, published a year ago. The report concluded that IR35 was poorly planned and executed. The reform to the private sector IR35 settlement was a disaster in terms of Government handling. However, the Government was quick to reply. They argued that the delay along with the need to reform off-payroll working meant long-term “pause” demands are unnecessary and wrong. A Government minister went so far as to state categorically that the Treasury’s “thinking has not changed” and argued that fair tax was mandatory for those who work like employees. The House of Lords enquiry argues with clarity that “fails to acknowledge that contractors bear all the risks for providing the workforce flexibility from which both parties benefit.” That report, from the Economic Affairs Finance Bill sub-committee, highlighted that some medium to large businesses have imposed “blanket status determinations”, with some deciding “not to use freelance contractors at all” to ensure compliance. It added that IR35 left some workers as “zero-rights employees”, with none of the rights of an employee or the tax benefits of being self-employed. The government argues that the reforms have been known for two years and furthermore that in return for becoming direct employees, workers should be receiving the benefits such as job security, pension arrangements and sickness absence. Many people will continue to operate PSC firms, invoicing multiple clients legally under IR35. Prestige Business Management can help clarify your legal rights and responsibilities.
IR35 Compliance Checklist
- Usually IR35 won’t apply to a contract for services rather than employment.
- Supervision, direction, control. Contractors that fall outside of IR35 have freedom over how they complete their work, including what hows they work and they could engage a substitute to complete the work.
- Mutuality of obligation (MOO) is a key test in working out self-employed status. If the client is obliged to offer work (and pay you) and you’re obliged to take it, this counts as employment.
- Self-employed contractors work on a project-by-project basis, once they complete a project, there is no obligation to work on further tasks.
- Self-employed contractors are expected to provide their own equipment.
- Self-employed contractors take on financial risk for the project, like any other business, they take responsibility for any errors made and rectify those.
- Typically the self-employed can work for multiple clients at once.
- The relationship between contractor and client is of supplier and customer by contract, this needs to be genuine.
- Clarify the relationship with the hirer before you start the contract by considering all of these principles.
- Seek expert IR35 advice from your trusted professional accounting service
Prestige Business Management Works for You
Prestige Business Management can help you ensure compliance with IR35 and clarify your legal rights and responsibilities. For more information call us today on 0203 773 2927.