Reforms to off-payroll working rules in the private sector were due to take effect in April 2020 but were delayed as businesses and individuals grappled with the coronavirus crisis.
The changes will now go ahead in April 2021.
Here is a reminder of the rules and what will be different from 6 April 2021.
What is IR35?
The aim of IR35 is to reduce tax avoidance by contractors who HMRC believe are people who work in a similar way to full-time employees but charge for their services via their limited company to make tax savings.
To tackle these situations, IR35 rules are designed to ensure that contractors working via their limited companies, deemed to be doing the same work of an employee, pay broadly the same tax.
What are the rules?
As a contractor or freelancer, you have to prove certain relationship criteria to determine whether you are ‘inside’ or ‘outside’ IR35.
You should consider the following in deciding your status:
Mutuality of obligation
As a self-employed contractor you can work on a project-by-project basis without any obligation to continue working for that client once the contract comes to an end and equally there is no obligation for the client to continue to offer you contracts.
If a client is obliged to offer you paid work and you’re obliged to take it, this is a contract of employment and you fall within IR35.
If a contract states that the client will not accept a substitute person to see a contract through from start to finish, this will fall within IR35. For a contract to fall outside of IR35 it should highlight that if a substitute worker is put forward, they can complete the contract work on your behalf.
Supervision, direction, control
You must have control over how you complete your work for a contract to fall outside of IR35. If the client provides excessive input over how work is completed, then it’s likely that this will fall under IR35.
If you consider you are ‘outside’ of IR35 rules, you can continue to invoice then pay yourself through your own limited company. If after the considerations above, you are deemed ‘inside’ IR35, this is an employment relationship and tax and National Insurance should be deducted from your earnings by your ‘employer’.
Who decides if I am in or out?
Currently, unless you are undertaking contracts within the public sector, the IR35 status is decided by you.
From 6 April 2021 however the responsibility to prove self-employed status will shift to the hirer (unless the business is a small business) and if HMRC deem you to be ‘inside’ IR35 and declares that it’s an employment relationship, then tax and National Insurance will be deducted from your earnings and the liability for any missing tax lies with you.
This could be viewed as the worst of both worlds for you as a contractor – if you are found to be ‘inside’ IR35, you will be taxed and pay NI as an employee without receiving employee benefits.
It’s important to consider your status now to avoid any nasty surprises. The gov.uk website has a useful tool for helping determine your tax status – https://www.gov.uk/guidance/check-employment-status-for-tax
If you are unsure or concerned about your IR35 status and need our advice, please contact us.