11/02/2021 UPDATE: IR35 reform coming into effect in April 2021
The IR35 tax reform in the private sector was meant to roll out in April 2020 but, due to the coronavirus pandemic, Chief treasury secretary Steve Barclay confirmed it to be postponed for 12 months.
IR35, otherwise known as the “off-payroll tax” will be reintroduced in April 2021 as part of the broad package of measures the Treasury has announced to protect the economy from the coronavirus outbreak.
This welcomed delay gave contractors and end clients more time to organise themselves and prepare for the new IR35 rules.
The reform will apply to the private sector and says that employers will now assess contractors to figure out whether they’re inside or outside IR35. If a contractor is found to be inside IR35, the employer or agency has to deduct the relevant national insurance and tax. These changes only apply to medium or large businesses as well, so smaller companies can breathe a sigh of relief.
Any contractors or locums who are concerned about IR35 should seek specialist advice from our IR35 accountants. Gorilla Accounting is an accountancy firm exclusively for contractors, and their team of accountants is happy to provide free, impartial advice for people during this difficult period.
Do you know if you’re a small, medium or large business?
According to the Companies House Act 2006, c.46, part 15, a ‘small business’ is defined as:
The onus for determining IR35 status will fall with the end client or agency, meaning contractors will not be the only one responsible for figuring out the right tax and national insurance contributions they must pay.
This is set to impact most contractors in the private sector and is estimated to add £1.3 billion per year to the Treasury from 2023. As contractor accountants, we can help you figure out whether you’re affected by IR35 and what you can do to prepare for the upcoming changes.
What is IR35?
IR35, also known as ‘intermediary legislation’, was introduced in 2000 to tackle ‘disguised’ employment’. This is to prevent an employer engaging an employee on a contract basis, where the employer will avoid paying Employer’s National Insurance Contributions or providing employment rights and benefits.
If you’re found to be within IR35, you must pay tax and National Insurance contributions in the same way as an employee. According to HMRC, many people are not classifying themselves properly, which is leading to economic losses of around £1.2 billion a year. So far, HMRC estimates that the IR35 reform in the public sector, implemented from April 2017, has generated £410 million in additional revenue for the Treasury.
There was an IR35 reform in 2017 and, in 2021, there will be further changes to the legislation.
- Control – are you under the direct control and supervision of your client? A contractor is not supervised like an employee is.
- Substitution – are you allowed to provide a substitute if you’re unable to work? If not, then HMRC would consider this to be an indicator of a contractor of employment.
- Mutuality of obligation – are there any expectations of future contract work after the current one expires? A self-employed contractor will work on a specific project that they’ve been contracted to do but there should be no further expectation of work by either side.
This is the ideal scenario for a contractor operating through their own limited company. If your contract lies outside IR35, you will not pay National Insurance contributions or income tax. As a result of your status, operating through a limited company is likely the most tax-efficient structure for your business.
HMRC introduced a service to find out if you, or a worker on a specific engagement, should be classed as employed or self-employed for tax purposes. The CEST tool gives HMRC’s view on whether:
- IR35 applies to an engagement
- the off-payroll working in the public sector rules apply to a public sector engagement
- a worker should pay tax through PAYE for an engagement
The unprecedented IR35 reform in the public sector has been the subject of disagreement as the CEST tool has been responsible for delivering confusing results. Around 15% of CEST users have received inconclusive results on their employment tax status.
HMRC states that, in order to use the CEST, the following information will be required:
- the worker’s responsibilities
- who decides what work needs doing
- who decides when, where and how the work’s done
- how the worker will be paid
- if the engagement includes any benefits or reimbursement for expenses
The answers should reflect the usual working practices of the engagement.
Companies must be aware of their new responsibilities if they plan on hiring contractors after 6 April 2020. This includes ensuring everyone in the company understands IR35 and its consequences (especially HR and recruiters) and executing an approach for the assessment of potential workers, mainly their employment status.
They should also have contingency plans in place if workers don’t want to switch to PAYE and implement processes like substitution into your operations.
As a contractor, there are several ways you can start preparing for the upcoming IR35 reform in the private sector. These include:
- Taking the HMRC IR35 test, which will allow you to assess your current business practices.
- Auditing your work practices after the test results, allowing you to assess how IR35 will impact you and how you can solve potential problems.
- Taking ‘substitution’ into account, as the right to provide a substitute is often a key component in IR35 investigations.
- Considering raising your rates, as working inside IR35 means paying more taxes than you initially thought.
Get in Touch with Us for IR35 Advice
If you’re looking for IR35 accounting, look no further. We can help you navigate the complicated IR35 rules and understand the impact the reform will have on your business, contact Larsen Howie, our specialist IR35 consultant, for more information.