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With changes to the IR35 legislation coming up next month (April 2021), businesses need to know what IR35 is, what the changes imply and if this will apply to their business. In this short post, we’ll provide an overview of what IR35 is and what you need to know about the upcoming changes.
What is IR35?
Despite what you may think, IR35 is not any new legislation. It’s been in force since April 2000 but has been heavily criticised in the past for being poorly conceived and not well implemented by HMRC.
IR35 is a set of tax laws that were introduced to resolve the problem of ‘deemed employment’ where individuals were working for companies as self-employed rather than having an employment contract. This would save organisations a considerable amount of money since they wouldn’t have to pay National Insurance Contributions, Apprenticeship Levy or other benefits, but individuals would be performing as employees without having those benefits.
As the original IR35 and off-payroll reforms failed to tackle these issues, the upcoming changes aim to improve the legislation where it previously fell short.
This article is intended as a quick overview only. If you are looking for specific, in-depth guidance, we recommend you get in touch with professionals who will be able to answer questions like: what is ir35? or how can I prepare for it?
Why are the changes happening now?
This may not be the first time you’ve heard of ir35. Businesses in the private sector were expected to be ready for implementation in April 2020. However, the pandemic has forced this agenda to be delayed until April 2021.
Who is concerned by the new legislation?
This legislation should generally apply if a worker provides services through a type of intermediary (such as a limited company). They are usually referred to as contractors. An intermediary could also be a partnership, an individual, an umbrella company, an agency or a personal service company.
The client (person or company hiring the contractor) will be responsible for determining if the off-payroll working rules apply. The aim is to ensure that contractors pay the same amount of income tax and national insurance contributions as employees since they are performing with the same intent.
Determining whether your case applies within or outside of the ir35 rules can be complex, and it is best not to play a guessing game – which could turn out to be costly. Always seek the advice of professionals who can guide you through the legislation.
Testing employment status
As employment types have diversified over the past few decades, employment tests carried out by the UK legal system also have had to evolve to reflect these changes. Generally, the ir35 applies three principles when determining employment status: control, substitution and mutuality of obligation.
Control will assess the degree of control that the client has over what, when, where and how the work is completed by the worker.
Substitution looks at whether the service is required to be completed by the worker or if a substitute can complete the work in their place.
Mutuality of obligation is a concept that indicates that the employer is obliged to offer work, and the worker has to accept it.
Other factors are taken into account when determining if ir35 applies, such as the contract type or financial risk.
What to do if ir35 applies to you
If ir35 applies to you, the legislation states how you should pay the extra income tax and national insurance contributions – this is where specialists will come in particularly handy. Not everyone is expected to understand the subtleties of legislation fully. It’s safer to have someone look at your specific case, so you know you are getting it right.
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