IR35 2021 Checklist
By Will Elton, Last updated: 2021-07-13 (originally published on 2021-03-09)
What is IR35?
Firstly, IR35 is the name for the off-payroll working rules. It’s there to assess whether a contractor is a genuine contractor or, what they call a ‘disguised’ employee, for the purposes of paying tax.
Typically, contractors working through their own limited company benefit from a certain level of tax efficiency. However, they also don’t get the usual benefits like sick pay or holiday leave. Oftentimes, contractors will misuse this tax efficiency by working under self-employment status when they should be considered an employee.
Thus, HMRC in the UK is amending the off-payroll working rules to stamp out this practice.
Who is affected by IR35 in 2021?
Basically, the IR35 rules ensure that contractors, who would have been an employee if they were providing services directly to clients, pay the same tax and National Insurance contributions as employees. The changes were set to take effect in 2020 but were put on hold during the coronavirus pandemic. IR35 will now come into play on April 3, 2021.
Also, the assessment obligation will sit with the business that engages the contractor. Should contractors be treated as employees for tax purposes, the client will then be responsible for the tax burden.
The changes to IR35 will have implications for medium to large businesses across all sectors. Particularly affected are oil & gas, IT, financial services and construction. According to the government, those who are genuinely self-employed will be unaffected.
The IR35 legislation was initially aimed for disguised employment in the public sector, which came into effect in April 2017. And now it will also include the private sector from April 2020. In 2018, a BBC presenter was fined £419,151 in taxes after a UK tax tribunal ruled her contract should have been subject to IR35 legislation.
To see whether you fall under IR35, HMRC will look at the whole picture, but there are three main principles:
1. Substitution: Does the contractor have to carry out the work personally, rather than being able to send a substitute?
2. Mutuality of obligation: Does the client have to provide the contractor with work, and/or does the contractor have to carry out any work that the client requests?
3. Control: Does the client have control over how, when, and where the contractor carries out the work?
If the answers are yes to these questions, this will indicate a quasi-employment relationship, which falls under IR35.
IR35 2021 preparation
Communication is key. It is in both parties’ interests for tax and employment status to be confirmed well ahead of major legislative change or a status enquiry from HMRC. Start by having a compliant written contract. But the true relationship between contractor and client will always supersede any written terms.
2. Collect evidence
For individual freelancers or contractors, you should collect evidence to show you belong outside IR35. Gather emails, supporting documents or agreements from a client reflecting that you operate as a genuine business. Should your client suddenly decide you belong inside IR35, if and when reform lands, you’ll be in a stronger position to overturn the determination.
Evidence includes your own company stationary, website, business cards and your office address, which will strengthen your argument that you operate as a business in your own right.
3. Consult a specialist
The sheer complexity of IR35 means it is worthwhile to have your contract reviewed by an unbiased and independent party. A specialist can carry out an IR35 contract review of not only your written contract but your actual working arrangement too. This will give you a well-informed view of your employment status.
4. Hire independent contractors as employees
There is no way to circumvent IR35 by firms, other than to hire all contractors on fixed-term employment contracts. However, this would be an expensive way of eliminating the problem. And it is extremely difficult for firms to renegotiate with all their existing contractors the kind of rate cut necessary to offset all the new taxes.
If you engage sub-contractors regularly, you can complete a Status Determination Statement (SDS) so you are clear about the employment status for tax purposes.
As April 2021 approaches, make sure you are all set for the new IR35 rules coming in to play the UK. If you have everything in place, it will reassure your contractors that your business is handling the changes properly and there will be no unpleasant surprises in the future.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.