IR35 is a significant tax change with serious implications for contractors and businesses that is being rolled out in April 2021.
Small businesses and freelancers will need to brace themselves for the introduction of the legislation aimed at tax avoidance.
What is IR35?
IR35 aims to stop people from working as contractors when they are effectively employees because they enjoy tax benefits from doing so.
For example, suppose a person operates a limited company but has only ever had one contract or customer. In that case, they will be affected by the introduction of IR35 and are likely to have to pay more tax.
Public sector employees already have to abide by the laws of IR35 – and from the spring, it will apply to the private sector as well.
What should we expect from IR35?
IR35 was initially conceived to prevent employees from avoiding tax by being treated as contractors.
After April 2021, employers must determine whether IR35 applies to any contractor they hire – and then they will need to treat them as an employee for tax purposes. It was initially due to come into force in 2020.
However, due to the coronavirus (COVID-19) pandemic in the UK and across the globe in early 2020, the government announced an IR35 delay. As a result, the new IR35 regulations were deferred to 6 April 2021.
What are the consequences?
If businesses continue to treat contractors this way, they risk HMRC having a different opinion of the situation and being slapped with a fine.
The biggest fear among businesses and contractors is how these relationships are defined, with genuine contractors possibly being classed as employees.
It will mean that those contractors might take an unfair tax hit, or the businesses that hire them may decide they are no longer of benefit because of the new rules and associated risk.
Why is IR35 being introduced?
Employers must provide employees with a workplace pension, paid holiday, sick pay, and possibly other benefits – as well as paying employer’s National Insurance contributions.
Contractors only need to be paid once and can be let go if need be. There is far less hassle and much more flexibility. From the contractor’s point of view, operating as a limited company means they are likely to pay less tax than if they are a sole trader.
This means that most contractors operate as limited companies, despite being the sole employee. Many of these then end up being an employee of the company because this situation suits both the contractor and the business that has hired them.
HMRC takes a dim view of this, hence introducing the IR35 legislation.
How do I check if I am inside or outside IR35?
An online check is available via the HMRC website called the ‘Check Employment Status for Tax’ (CEST).
Some industry bodies say it is not fit for purpose, though, so be careful on relying upon it for a definitive view of your status.
What can contractors do about IR35?
There are steps you can take. The most important thing is showing you are in business and not an employee.
This can be demonstrated in several ways:
1. Show that you are simply providing a service rather than under the control of a manager.
2. Name the company something other than your own name. Again, it sounds simple, but it emphasises difference.
3. Demonstrate that your working conditions and benefits are far different from employees – such as hours, pension, and associated benefits.
4. Maintain an office away from your contracted place of work. Even a converted bedroom will demonstrate you are a business in your own right.
5. Have multiple clients. This is probably the most significant step you can take and truly shows you are operating as your own entity.
Will businesses have to give contractors employment rights?
There is a possibility that contractors who fall within IR35 rules will claim full employment rights, such as holiday and sickness pay, pension, and other benefits.
Each case will need to be examined on its own merit, and it’s highly advisable to take expert advice on what your obligations will be before entering into negotiations.