What is IR35 and why is it in the news?
- IR35 is a tax law in the UK that identifies contractors in businesses, that avoid tax by working as ‘disguised’ employees or businesses engaging workers as independent contractors to disguise their true status thus avoiding employment rights. From 6th April 2021 all public authorities and medium and large-sized clients are responsible for deciding if the rules apply to them. If a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the workers employment status and if the rules apply.
- The off-payroll working regulations are sometimes known as IR35. The off-payroll working rules can apply if a worker (sometimes known as a contractor) provides their services through their own personal service limited company or another type of intermediary to the client. The intermediary can be in the form of an individual or the worker’s own company or the worker’s own partnership.
- The rules make sure that workers pay broadly the same tax and National Insurance contributions as employees. This collection of rules is commonly referred to as IR35. Engagers, hirers, and end clients determine whether the off-payroll working rules apply.
- The new IR35 reform will shift this responsibility and tax payment responsibility to the employer. (Unless you work for a business, as defined by the Companies Act that has a turnover or balance sheet of £10.2 million or less, and fewer than 50 employees). Furthermore, the ‘engaging’ companies will be liable for the incorrect status assessment if HMRC rules against it.
- However, Businesses cannot form subordinate firms to avoid paying contributions in instances where freelancing is judged to fall inside IR35.
What is a Status Determination Statement?
- A Status Determination Statement is a legal requirement of the new legislation and determines your employment status for tax purposes only following an IR35 assessment which the end client must undertake (and take reasonable care in doing so). Your client should have processes in place, not only to determine the IR35 status of each and every engagement but also to deal with any challenge you might make if you disagree with that determination.
How to determine my IR35 status?
The following factors determine employment status whether your contract is for services (outside IR35) or of employment (inside IR35):
- Inside IR35:
- If you personally do all the work your company is contracted to do by a third party, you may be outside IR35 . If you work for your own limited company but Eg. receive employment benefits such as paid leave or sick pay, your client pays you in a timely manner, someone from the company closely supervises your work, you work on a client’s premises, use their equipment, following the rejection of work, you correct your work at the expense of your client, and your business name is not proprietary this is disguised employment and inside IR35.
- A contractor inside the IR35 pays the same taxes and NI as an employee.
- Outside IR35:
- It follows that you are able to delegate or substitute work to someone else, if you exercise that right in practice.As a self-employed individual you are unlikely to receive a variety of employment benefits. Working for your own limited company and having no employee benefits, such as paid leave or sick pay, may put you outside IR35. You decide how and when you want to work and can send a substitute to do the job if you please, you supply the appropriate equipment and may work from your own premises. Also if you commonly have more than one client at a time or short-term projects with a variety of clients. You provide all your own premises, insurance, and branding, as well as correcting any rejected work at your cost.
- If you are outside the IR35, nothing changes. The fee is a flat fee as invoiced to the client, and you must handle taxes on your own. The actual working arrangements must support the contractual rights.
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