Whether you’re new to contracting or you’ve been working for yourself for some time, IR35 can be difficult to understand. As a complex piece of legislation, its nuances can often cause a great deal of confusion.
Our guide is here to help you understand what IR35 is, why it was introduced and what the updates to the public and private sector have meant for the working practices of contractors.
What is IR35?
IR35 is a tax legislation which was designed to combat disguised employment amongst the self-employed. In short, IR35 comes down to one crucial factor: are you a full employee or a genuine contractor?
The aim of the IR35 legislation is to decide if the work you're doing should really be classed as full employment, rather than genuine project-based contracting work. If you're a genuine contractor, you'll be outside of the legislation and can take advantage of the tax efficiencies associated with working through a limited company.
If your role is classed as employment and subject to Supervision, Direction and Control, however, it’s more than likely that you’ll be deemed inside IR35 – meaning you’ll need to pay Income Tax and National Insurance on your earnings just like an employee would.
IR35 for public sector workers
If you work as a limited company within the public sector, you may be subject to IR35 legislation changes which were introduced on the 6th April 2017. As an overview, the changes mostly affect who decides whether or not a contract falls inside or outside IR35.
After April 2017, for contractors working within the public sector, the decision shifted from the contractor to the public sector body, who must inform the body that pays the contractor.
IR35 in the private sector
Following the IR35 reforms in the public sector, it was confirmed in July 2019 that the government would extend the legislation in the private sector. Initially, the private sector reforms were due to take effect in 2020, but were delayed until 2021 in response to the COVID-19 pandemic. Though closely following the public sector reforms, some key distinctions were announced:
The small companies exemption
For companies that HMRC deems as small, they will remain exempt from private sector reform. This means that contractors engaging with a small private sector company will still be required to set their own IR35 status.
HMRC deems a company as ‘small’ and therefore exempt from the IR35 reform if they meet two of the following criteria:
- Annual turnover doesn’t exceed £10.2m
- Balance sheet total doesn’t exceed £5.1m
- No more than 50 employees
In this situation, if you are the fee-paying agency placing contractors into ‘small’ companies, the contractor will continue to set their IR35 status and carry the liability.
IR35 reform is not retrospective
For those contractors deemed to be caught inside IR35 by the legislation from April 2021, but were previously outside IR35 assignments, HMRC won’t look retrospectively at the assignment and pursue them or the fee-payer for employment taxes.
5% expense allowance
As was the case in the public sector, the 5% expenses allowance, which HMRC allowed contractors operating inside IR35, was removed. This allowance was initially introduced to help contractors cover the expenses of administering IR35 and calculating the ‘deemed payment.’ However, given the new responsibilities on the end-hirer to determine the IR35 status of the contract and the fee-payer to make deductions for tax and National Insurance, the government has scrapped it.
Should the contractor work inside IR35 with a ‘small’ company in the private sector, this allowance will still apply.
Introduction of the Status Determination Statement (SDS)
When making IR35 decisions, private sector companies are required to share their reasons for a particular determination with contractors and the first recruitment agency in the supply chain. This must then be passed down the chain until it reaches the ‘fee-payer’.
HMRC calls this a Status Determination Statement (SDS) and has introduced it with the aim of increasing transparency with regards to assessments. Until the client shares this with the contractor and the fee-payer, they will carry the liability and therefore the risk.
The client must demonstrate that they have taken ‘reasonable care’ when undertaking the Status Determination Statement. If reasonable care has not been taken, they will assume the role of the fee-payer if the contract is found to be inside IR35.
What is reasonable care?
Whilst initially ambiguous and at the discretion of the end client to determine, HMRC revised the definition of reasonable care following an influx of ciritism. HMRC’s Employment Status Manual outlined the ways it can be shown. Some examples include:
- Applying HMRC’s IR35 determining criteria
- Accurately completing HMRC’s CEST tool
- Seeking the help of a professional advisor
The transfer of debt provision
The IR35 private sector reform introduced a new power for HMRC to collect PAYE that goes unpaid from other parties in the supply chain. This means that if the fee-payer fails to make deductions and pay the PAYE tax and National Insurance liability, HMRC can recover the unpaid liability from other organisations in the supply chain on all contracts in both the public and private sector from April 2021.
Does IR35 impact me if I’m working under an umbrella company?
As an employee of Parasol, the good news is that you won’t be affected by IR35. The legislation only covers self-employed contractors working through their own Personal Service Company (or PSC), so there's no need to worry.
If you’re a limited company director, our sister company ClearSky Contractor Accounting has an essential IR35 guide to help.
With you all the way
We understand that IR35 can be difficult to understand. That’s why we’re on hand to help. With more than 20 years of experience guiding contractors and recruiters, our team of experts are well-versed in all things tax and legislation.