Changes are coming to the private sector starting from April 2021, lead by the IR35 reform which will align it with the public sector where these changes were implemented in 2017. IR35 rules allow HMRC to collect tax and NI contributions if you, as a contractor, are operating through an intermediary, such as a limited company, and, if not for the intermediary, you’d be an employee of your client. In the public sector, it is up to the engager (the contractor’s client) to determine whether IR35 applies. If it does, the engager would place the contractor onto their payroll and deduct income tax and National Insurance before making the payment. If the contractor’s contract is in the private sector, IR35 requires the intermediary to make an extra payment to compensate for the additional tax and NI that HMRC would have received on an equivalent employee’s wages. IR35 won’t apply if the contract is for services rather than employment.
The primary aim was to dissuade an increasing avoidance of tax and national insurance by individuals providing their services through a Limited Company set up for that purpose, commonly known as a Personal Service Company (PSC). The purpose was to determine the relationship between the client and the worker, and where disguised employment was apparent, to ensure that the same levels of income tax and national insurance were paid as a normal direct worker engaged under PAYE.
To be able to distinguish whether IR35 applies to you, you need to pay attention to these three determinators:
- supervision, direction, control – this relates to how much say your client has over how you complete your work. For example, if you have to work at certain times, this implies employment
- substitution – are you able to send someone else in to complete the contract, or do you need to do the work yourself? If you’re not allowed to send someone else, you’re most likely to be within IR35.
- mutuality of obligation – is there an obligation on the employer’s end to offer work, and do you have to accept it? This is called mutuality of obligation, and if an element of it exists, the contract may fall inside IR35
There are more criteria to consider when working out your IR35 status:
- equipment– HMRC often tries to argue that if the equipment is provided by the client, and you don’t use your own, you’re a disguised employee
- financial risk– self-employed contractors usually take a degree of financial risk, as any business would. Are you responsible for errors made during the contract, and would you need to rectify them in your own time?
- the way you’re paid– self-employed people are paid on a project basis, which might mean when the work is completed or at particular project milestones
What are the new IR35 rules?
Contractor related
If your client is a small company, your limited company will be responsible for assessing whether IR35 applies. The Companies Act 2006 defines a small business as a business with two or more of the following:
- Turnover of £10.2m or less
- A balance sheet total of £5.1m or less
- 50 employees or fewer
Client related
- Both public and private sector businesses engaging contractors will be responsible for assessing the contractor’s employment status and disclosing whether they are inside or outside of IR35
- If it is determined that the worker is inside IR35, the business, agency or third party that pays the contractor’s limited company will need to deduct income tax and employee NI contributions and pay employer NICs to HMRC
- This rule will not apply to the small businesses defined by the Companies Act as having an annual turnover of less than £10.2 million, balance sheet total less than £5.1 million and less than 50 employees
- If a contract is inside IR35 the fee-payer must make appropriate deductions for all employment taxes (income tax, NICs, and the Apprenticeship Levy) in the same way as for an employee
- If a contract is found to be non-compliant with IR35, the client will be responsible for paying income tax and NIC due to HMRC
