What is IR35?
IR35 is tax legislation aimed to combat tax avoidance by both workers and companies hiring them with an “off-payroll” tax.
It’s a move to tackle workers who are “deemed” employees, i.e., those engaged in long-term self-employed work for an organisation, often through a limited company or other intermediaries, instead of being formerly employed with an employment contract. Many businesses using this workaround have been avoiding paying National Insurance Contributions, pensions, and other employee benefits or rights.
Initially, IR35 was introduced in April 2000, however, it is now being extended to the private sector from 6th April 2021. It is hoped it’s roll-out will improve the integrity of workers’ rights for contractors, as well as prevent previously lost tax.
Who does IR35 impact?
Contractors working with organisations, and as such, the organisations hiring them are directly impacted by this change in tax legislation. All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the IR35 rules apply. It’s expected a variety of industries will be affected, such as security, construction and facilities management.
How does IR35 work?
As IR35 legislation is effectively turning contractors and small businesses into employees, they must apply the three ‘tests of employment’ principles to determine employment status.
- Control – what level of control does an organisation have over where what, and how a worker completes their work?
- Substitution – is this specific person required to fulfil the work or can a substitute be sent in place?
- Mutuality of obligation – is the organisation obliged to provide work? And is the worker obliged to complete it?
Other factors to consider include if you are taking a financial risk if you are considered “part and parcel” of the organisation, provision of equipment and being in business on your own.
What does it mean for businesses?
Organisations are responsible for deciding the employment status of their workers and contractors. A contract for ‘off-payroll working must be written and agreed to by the worker. The organisation must pay the contractor fees (“direct deemed payment”) which is treated as employment income i.e., a salary. This means PAYE and NI are deducted and the organisation has to pay the additional employment taxes (“off-payroll taxes”) as well. It’s important to note these employment taxes cannot be deducted from the contractor’s fees.
For any organisations with contractors or self-employed team members, it’s critical to understand and follow best practises. Particularly, due diligence is needed when hiring and on-boarding long-term contractor work, to ensure the correct steps are taken and compliance is met.
Need more help?
The new IR35 are coming into effect from 6th April 2021, impacting organisations, agencies, and contractors. If you’re not sure if these changes impact you or your business you can Check your Employment Status For Tax, and seek additional guidance on the UK Government website.