What is IR35?
IR35 is the set of tax rules which govern off payroll working. The rules have been around for over 20 years and look at the way in which those who are employed as contractors pay tax.
A contractor is typically determined as someone who provides their services to a client through their own limited company or another type of intermediary.
There are benefits to both the worker and employers of hiring someone on a self-employed contractor basis.
For employers there are no additional costs other than the fee they have agreed with the contractor – they do not have to pay holiday or sick pay for example and have no liability for National Insurance contributions. For the worker, there are associated tax efficiencies, the ability to manage their own workload and have a more flexible schedule than if employed directly.
In many cases where those employed on this basis are genuinely self-employed this is an arrangement which is absolutely fine.
But IR35 rules aim to prevent what is known as ‘deemed’ or ‘disguised’ employment – whereby workers employed on a self-employed contractor basis are effectively employees but are employed on a self-employed basis to take advantage of the above benefits. IR35 rules seek to ensure that ‘deemed employees’ pay broadly the same Income Tax and National Insurance contributions as employees
How have IR35 rules changed in 2021?
Changes were made to the IR35 rules from the 6th April 2021.
For medium and large sized businesses, responsibility to determine an individual’s employment status and whether IR35 rules apply or not move from the worker to the client. This had been the case for public sector businesses since April 2017 but now applies to the private sector as well from 6th April 2021.
For those providing services to a small business, then the responsibility to determine employment status and therefore whether IR35 rules apply remains with the worker.
The employment status which is decided by your review will determine whether a worker is subject to off-payroll working rules. If the rules do apply, then the workers fees will be subject to Income Tax and National Insurance contributions.
Who will be impacted by IR35 changes in 2021?
The rules apply to all public sector clients and private sector companies that meet 2 or more of the following conditions:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million
- you have more than 50 employees
If your business meets these conditions, then you will need to decide the employment status of every worker who operates through their own intermediary.
You must issue a Status Determination Statement (SDS) to those you contract with, providing your conclusion regarding their employment status and the reasons that you believe this to be the correct status.
If you operate as a contractor then it is also worth you having a good understanding of the IR35 rules and whether you fall inside or out of IR35. You have the right to dispute a decision provided through an SDS if you do not believe it to be correct.
Given the complexities of IR35, for full details on IR35 rules refer the government website for guidance.
What happens if you fall foul of IR35 rules?
The government have announced that businesses will not face penalties for inaccuracies relating to IR35 status in the first 12 months of the rule changes. Unless evidence of deliberate non-compliance is found.
Help and support will be provided to those businesses aiming to comply with the rules and help to correct any mistakes made will be provided to those who make them.
Businesses who display deliberate non-compliance with the rules however could see their details published to the public domain.
Penalties will apply after the first 12 months of the rules change and could see businesses who fall foul of IR35 rules face HMRC investigations, having to pay unpaid PAYE and National Insurance contributions, as well as possible late payment fines and interest. And in some cases, additional penalties.
If you employ staff on a contracted basis and need to work within the IR35 rules, in some cases now may be a good time to look at whether you have legal expenses insurance for your business. Legal expenses insurance can help provide cover for the costs of challenging the results of an HMRC investigation into IR35 if you can prove you haven’t deliberately evaded the law or rules.
At Anthony Jones we work hard to support our customers with risk management advice and believe this to be an invaluable element of the service we provide. Get in touch with us today on 020 8290 9080 or email us at firstname.lastname@example.org to discuss how we can help your business make the right insurance decisions.