What is IR35 and why is it in the news?
IR35 is shorthand for the UK tax legislation that is designed to identify contractors and businesses which are avoiding paying the appropriate tax by working as ‘disguised’ employees, or are engaging workers on a self-employed basis to ‘disguise’ their true employment status. IR35 was introduced in April 2000 and takes its name from the original press release published by Inland Revenue (now HMRC) announcing its creation.
IR35 is also known as the off-payroll working rules. The off-payroll working rules can apply if a worker (sometimes known as a contractor) provides their services through their own limited company or another type of intermediary to the client. The intermediary can be in the form of an individual or the workers own company or the workers own partnership.
The rules make sure that workers pay broadly the same tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’. The client also known as the engager, hirer or end client will be responsible for determining if the off-payroll working rules apply.
Changes to IR35 legislation will come into force from 6 April 2021. IR35 applies on a contract by contract basis, so you may have some contracts that are inside IR35 and some that are outside IR35. Your status impacts the employment taxes you will pay. Business using your services will be responsible for deciding your employment status.
Under the new IR35 reform, responsibility for setting IR35 status and paying relevant tax will be passed from the worker to the client (unless you’re working with a small company in the private sector as defined by the Companies Act as having an annual turnover of £10.2 million or less, balance sheet total less than £5.1 million and less than 50 employees) This also means that the ‘engaging’ businesses will be held liable should HMRC decide status has been incorrectly assessed.
New rules will apply to parent companies, so larger businesses won’t be able to setup smaller companies to avoid paying contributions where a freelancer is deemed 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):
You could be outside the IR35 if you carry out all of the work that your company is contracted to do personally, you work for your own limited company, but receive employment benefits such as paid leave or sick pay, you are being paid on a time basis, you have close supervision by somebody in your client’s business, you are supplied with the equipment by a client and work at their premises, you work for one client long-term, all rejected work is corrected at your client’s cost, you do not have your own business identity.
If you are inside the IR35 you pay the same tax and NI as you would if you were an employee.
You could be outside the IR35 if you have the right to delegate or substitute work contracted to another person and that right is exercised in practice, work for your own limited company and do not receive employment benefits such as paid leave or sick pay, are being paid on a project basis or at a fixed price, 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, you work with more than one client at one time or on short successive projects with a variety of clients, all rejected work is to be corrected at your own cost, you have your own premises, insurance and branding.
If you are outside the IR35, nothing changes. You are paid a flat fee as normal and are responsible for managing your own taxes.
It is important to remember that these contractual rights must be supported by the actual working arrangements.
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