Of all the recent changes to UK tax law, perhaps the most confusing and complex has been the reforms to IR35.
The long standing rules for off-payroll working rules were rolled out to the private sector in April 2021, but the Government promised to be lenient on mistakes for the first year.
This grace period has now ended, so it is important that all businesses and individuals understand and comply with their obligations. Here is our overview on the law and what your obligations may be.
What is IR35?
IR35 is designed to prevent tax avoidance by the self-employed who work for a business through a personal company but are, for all intents and purposes, an employee.
It requires off-payroll workers to pay the same rates of income tax and national insurance contributions to those by traditional employees.
IR35 is actually the name for an older set of laws that were introduced in 2000, but they proved difficult to implement, provoking widespread criticism from businesses and tax experts.
This led the Government to replace the legislation with a new set of rules in 2017. Also known as the “off-payroll rules”, it is this new legislation that we now refer to as IR35.
However, until 2021, it did not apply to the private sector.
Who does IR35 apply to?
IR35 now applies to private medium and large businesses that hire workers through an intermediary, as well as the public sector, trying to tackle “disguised employees”.
IR35 is built on the premise that some workers who hire out their services through a personal company or third party enjoy all the benefits of secure employment but pay less tax because they are technically not employed, but contracted.
In the past, it was the contractor’s duty to report their employment status. Now, the duty is on the hiring business, which will have to use special criteria to determine a contractor’s ‘true’ employment status for tax purposes.
When does IR35 apply?
HMRC judges IR35 cases on a number of criteria. A worker will be considered employed under IR35 if:
- they have to carry out the work themselves, and cannot send a substitute in their place
- the employer has a degree of control over when and how the job is carried out, rather than the worker setting their own schedule
- there is a mutual obligation – the employer has to provide work and the worker has to complete it.
This is a basic overview and good rule of thumb, but there are many other factors to consider. It is important to remember that IR35 is judged on a contract-by-contract basis.
This means that the same contractor can carry out multiple jobs, but IR35 rules may only apply to some of them.
Will the rules change again?
IR35 has always been controversial and, even in its new form, it continues to face heavy criticism.
Many fear that it could have serious consequences for the labour market, with businesses choosing to abandon contractors altogether, rather than risk making a mistake.
Earlier this year, the House of Lords published a set of recommendations for improving IR35.
These included modifying the Government’s online CEST (Check Employment Status for Tax) tool to include questions about mutual obligation. It also suggested that more research should be conducted into the economic impact of IR35 in light of COVID-19.
Despite this, it seems that IR35 will remain the same for the foreseeable future. In its response to the House of Lords, HMRC talked of “learning lessons”, but gave no indication that it would be making major changes.
Steps to take to avoid problems
It may be unpopular, but IR35 is still the law. Now that the grace period has ended, failure to comply could have serious consequences.
Although no private firms have yet been penalised, the Home Office itself was last year issued with a £4 million fine for “careless” application of the IR35 rules, as well as a tax demand for many millions of pounds more. This should be enough to demonstrate that HMRC is serious about enforcing the legislation.
But with proper planning and preparation, you should be able to keep on top of your obligations when it comes to working with contractors. We have been following IR35 since the beginning and are happy to answer any queries you may have.
If you have any questions about the law and its implications, get in contact for assistance.