New April 2020 Tax Rules In UK: How to comply with IR35
By Will Elton, Last updated: 2023-01-18 (originally published on 2019-10-16)
The new off-payroll IR35 rules are coming in April 2020 in the UK private sector, how do I prepare?
What is IR35?
First things first, IR35, or Intermediaries Legislation, is a set of tax laws which form part of the Finance Act in the UK.
IR35 takes its name from the original press release published by the then Inland Revenue, now Her Majesty’s Revenue and Customs (HMRC) announcing its creation.
In essence, the new IR35 rules stipulate that employees “disguised” as individual contractors or contractors who are in substance employees of a company, must pay the same taxes as the employees. I.e. IR35 is designed to tax disguised employment. Which is when an individual engages with a business through a third party, such as a personal service company (PSC). And in so doing receives tax benefits that they wouldn’t be able to enjoy if they were an employee.
Currently, in the private sector, it is the role of the PSC to determine whether the individual falls in, or out with, IR35 and to pay any increased tax. However, from April 2020 that assessment obligation will sit with the business that engages the contractor (“the client”).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.
How to prepare?
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 stationery, 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.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.