What is IR35?
IR35 is a UK legislation designed to increase tax and national insurance contributions from contractors who set themselves as a part of a limited company and as a result, benefited from the lower tax rates. The legislation aims to identify ‘disguised employees’ who, in the view of the government, were ”exploiting the tax system”.
This means that the relationship between parties is seen and judged as more of an employer-employee relationship rather than two equals.
In that case the worker should be taxed according to the employee rules, rather than benefiting from the lower tax rate.
British government believed that many of the contractors were abusing the tax system by using this loophole. As a result, this legislation was introduced in 2000 by Gordon Brown.
When do IR35 Rules Apply?
According to the official guidance IR35 rules apply if:
- You are a worker who provides their services through an intermediary (often recruitment agency or employment business);
- You are a client who receives services from a worker through their intermediary;
- You are an agency providing worker’s services through their intermediary.
The rules apply if the worker employed through intermediary could be judged as an employee if employed directly by the company and as a result, would be eligible for the employee contributions of national insurance and tax.
What are the changes introduced in April 2021?
Before April changes, contractors themselves were responsible for determining their status under IR35 rules. Since April 2021, this decision will be made by the client (receiver of the service provided by the contractor). This decision will also need to be communicated and documented.
The responsibility of collecting the tax revenue will then shift onto the fee-payer, which often means agency or recruitment company involved in the process. The fee-payer will then deduct the National Insurance and Tax deductions from the invoice before paying the client.
Who will be affected?
Recent changes will effect businesses working with self-employed contractors who operate under a Personal Service Company (Recruitment agencies and employment businesses). PAYE workers, small businesses and sole traders are currently exempt from the changes.
How to determine your IR35 Status?
Determining IR35 status can be tricky. In order for the contract to sit outside the IR35 rules, it must be seen as a service provided by one business to another, rather than service resembling employer-employee relationship.
In order to help determining your IR35 status three tests can be considered:
- Do you provide personal service to your client or is it a genuine business-to-business service?
- Can you provide a substitute worker to provide the service as any business would be able to?
- What is the level of control of services you provide by your client?
- Are you in control of the work being carried out or is it directed by your client?
Mutuality of Obligation
- Are you obliged to provide consistent service to the business?
- Are you obliged to accept this work?
Part and Parcel
- Are you an internal member of the client’s organisation?
- Are you a part of an employee lists?
What are the consequences of IR35 changes?
The recent changes will most likely impact the recruitment business, where under the current legislation, recruiters will be responsible for paying their candidates NI and Tax. However, it is expected that they will be seeking reimbursement from the end-user. Still – the overall administrative costs will increase.
For contractors – being inside IR35 will require them to pay NI and Tax contributions on the same level as the regular employees, without getting the perks such as paid holiday or sick leave. In general it’s projected that being ‘inside of IR35’ might reduce contractor’s net income by up to 25% . HMRC can also investigate contractors up to 6 years prior to see if the legislation applies – costing them thousands of pounds of unpaid contributions.
The changes in general will most likely impact the availability and retainment of skilled contractors due to the financial implications of this change.
If you need any further guidance about how IR35 will affect you as our candidate, feel free to contact us here.