There has been a lot of confusion about what IR35 is and where it applies. Many contractors (workers) do not understand whether the rules apply to them and when. Employers are just as confused about which employees fall inside IR35 and which do not.
This article will provide you with a better understanding of what IR35 is and how this may impact you.
What is IR35?
IR35 is an alternative name for the off-payroll working rules. It was introduced in 2000 by the government to tackles the issue of ‘disguised employment’. Some contractors take advantage of the tax efficiency given to the self-employed. The off-pay working rules are a solution to this problem.
Contractors provide their services through their own limited company. They enjoy many benefits, such as avoiding National Insurance and work flexibility. But they do not get the same benefits as an employee, such as holiday and sick pay.
The purpose of IR35 is to ensure that contractors pay the same Income Tax and National Insurance contributions as employees. If your contract falls within the off-payroll working rules then you are inside IR35. If your contract falls outside of the rules, you are self-employed and therefore outside IR35.
Who does IR35 apply to?
The off-payroll working rules will likely affect you if you are:
- An intermediary
- Client
- Agency
An employment intermediary is a person or business that arranges employment for a person to work for a third party. Put more simply, the employment intermediary supplies workers to work for a client or another employment intermediary. An intermediary is usually the contractor’s own personal service company (e.g., a limited company). The third party then pays the employment intermediary for the contractor’s services.
A client receives services from a contractor through an intermediary. A client needs to be aware of the new rules to ensure the contractor is paying roughly the same tax as an employee. An agency provides contractors services through an intermediary. An agency’s responsibility largely depends on the client and intermediary.
When does IR35 apply?
So, to clarify, the off-payroll working rules only apply if a contractor provides their services through an intermediary. If the contractor worked directly for the client, they would be an employee.
A contract for IR35 can be a “written, verbal or implied agreement between parties”. A contractor has to apply these rules on a contract-by-contract basis. A contractor may have some contracts that are outside IR35.
What are the changes?
The IR35 changes were delayed in 2020 as a result of the coronavirus pandemic. However, from April 2021, the changes were made.
Gov.UK states that “all public authorities and medium and large-sized clients outside the public sector are responsible for deciding if the off-payroll working rules apply”. In the public sector, the responsibility for IR35 has always been that of the public sector body. On 6th April 2021, the new IR35 rules were implemented to align the private sector rules with the public sector rules.
The rules are as follows:
- Public authorities are responsible for deciding if the rules apply in the public sector
- Medium and large-sized businesses are responsible for deciding if the rules apply in the private sector.
- Intermediaries are responsible for deciding if the rules apply in the private sector for small-sized businesses.
A small sized business has to meet two of the following criteria:
- Less than 50 employees
- Annual turnover does not exceed £10.2 million
- Balance sheet total not more than £5.1 million
Final Thoughts
Contractors need to ensure they understand the new government rules. Failure to follow the off-payroll working rules can result in consequences for clients, intermediaries and contractors. Contractors should always ask for a contract that clearly states whether you are inside or outside IR35. Contractors should also be aware that this may change from client to client.
Contact Count to learn more about IR35 and how this affects your business.