Reform to the IR35 rules has been paused, but only until April 2021.
According to HMRC statistics, only around 10% of limited company contractors who should comply with the off-payroll tax rules – also known as IR35 – currently do so. The tax office also estimates it could lose out on around £1.2 billion a year by 2022/23 as a direct result. While here at QAccounting, we fundamentally disagree with these numbers (which seem remarkable), they form the basis for Government’s argument that IR35 needs to be reformed in the private sector. After a last-minute delay to IR35 reform due to COVID-19, changes to off-payroll working will now land in the private sector on 6th April 2021. And given, at the best of times, IR35 is a complex issue, in this article, we’ll explain the basics of off-payroll working…
What are the off-payroll working rules?
IR35 is the colloquial name for HMRC’s off-payroll working rules, which were first introduced in 2000 to stop ‘disguised employment’, which occurs when a contractor provides an employment service to their client but still pays taxes like a self-employed individual.
The off-payroll rules apply to contractors that supply their services through a limited company, dubbed Personal Service Companies (PSCs). A distinction of a PSC is that the business has been specifically set up for a single contractor to provide their services through. The contractor is often the sole shareholder and director of the business.
The IR35 legislation is designed to catch and make sure so-called ‘disguised employees’ pay broadly the same tax and National Insurance Contributions (NICs) as an employee would.
A PSC contractor could be classed as a ‘disguised employee’ and therefore inside IR35 if they:
- Provide services to clients through their own intermediary – most commonly a limited company that they control, but this could also be a partnership or a managed service company.
- Enjoy an employee-employer relationship. In other words, are guaranteed work, have set working hours, are supplied equipment and receive the same benefits as employees.
How do I know if I’m a disguised employee?
If you’re ‘caught’ by or found to be ‘inside’ the off-payroll rules, it means that HMRC classes you as a ‘disguised employee’. It’ll be up to your end-client to decide if you’re inside or outside IR35 post-April 2021 (as has been the case in the public sector since 2017), but until then it’s your responsibility as the contractor to decide which side you fall.
While IR35 status is ultimately decided by taking a holistic view of your contract and working practices, there are three key status tests (Personal Service, Control and Mutuality of Obligation) that are used to determine IR35 status. You can read more about what’s taken into account in an IR35 assessment here.
What if I’m found to be inside the off-payroll working rules?
If you fail an IR35 test, you can expect to pay around 25% more in tax every year, which would amount to a significant chunk of money every month. You also still wouldn’t benefit from employment rights or have a contract of employment with your client, so you could face critical financial issues with no real benefits or protections to speak of. With this in mind, contractors who hold a true business to business relationship with their client that belongs outside IR35 must take the necessary precautions to avoid this situation. For example, an IR35 contract review is essential in deciding and protecting your status.
Of course, if you are a genuine contractor, freelancer or consultant who is in business on your own account, you shouldn’t have anything to worry about. For more information and to learn more about QAccounting’s range of IR35 solutions for contractors, please request a callback and one of the team will be in touch.