Designed to assess whether a contractor is a genuine contractor rather than a ‘disguised employee’, the IR35 is another name of the off payroll working rules and was developed for the purposes of paying tax.
Whilst contractors who work through their limited company don’t get employee benefits like annual leave or sick pay, they do have much more flexibility and control over their work and enjoy a level of tax efficiency. Some contractors take advantage of this and work as if they’re self-employed when in reality, they’re actually classed as employees. This is why the HMCR designed the IR35.
The IR35 tackles these ‘disguised employees’ through an employment status test for tax which calculates whether a contractor is working towards employment status or they are in fact self-employed.
‘Inside IR35’ contracts point towards employment with HMRC seeing you as an employee of the organisation. Therefore, you face the same income tax and National Insurance figures that regular employees do.
If your contract is ‘outside IR35’, then your role points towards self-employment and you can remain enjoying the tax efficiency of this.
What are the April changes?
There are upcoming changes to how the IR35 works. As of 6th April 2021, all public sector clients and medium or large-sized private sector clients will be responsible for deciding contractor’s employment status, including charities and third sector organisations. Prior to this date, this rule was the same for the public sector however as of April, a contractor within the private sector no longer gets to decide on their status themselves; the client does instead.
What do the Changes Mean for Me?
As a small business: for contractors providing services to small businesses in the private sector, these rules do not change anything as small businesses are exempt from the changes.
As a medium-sized / large business: you are now responsible for determining your contractor’s employment status. This in-turn means you are also now responsible for deducting tax and National Insurance from your worker’s fees and paying them to HMRC.
As a contractor: should you be working in the public sector, or a medium to large sized business within the private sector, the organisation you provide work for will not determine your employment status. As a contractor, you have the right to be given the reasons behind their decision in a Status Determination Statement, and you can dispute it should you feel the need to.
As a freelancer: luckily for freelancers, the Government has announced that this will not affect people who work as genuine freelancers. It is instead being targeted at contractors who set up a Personal Service Company and use that for their own business.
To find out more about the IR35 and its upcoming changes, check out the Government website now.
At Douglas Stuart our Contract Team are geared up to responding to a market place that is diverse, challenging and changing. We know that your business has to anticipate recruitment needs in the long, medium and short term, and whether it’s a future project, or a sudden absence, we ensure that you always have access to the top talent. Get in touch with our Contracting Team at firstname.lastname@example.org or call 0161 967 9670.