IR35 is a tax law that was originally brought in back in 2000 as a way to combat tax avoidance by contractors.
Also known as off-payroll working rules, IR35 ensures that if a contractor is disguised as an employee, then that person pays the same income tax and national insurance as an employee would.
When determining IR35 status, you need to consider the following:
- How much supervision or control does your client have over how you complete your work? If the client has control, this implies employment.
- Can a substitute fulfil the work required? If only you can carry out the work, this also suggests employment.
- Is the client obligated to offer you work and are you obligated to accept? If there’s an element of mutual obligation, this indicates that your contract may fall inside the rules.
If the HMRC deems that your contract falls inside IR35, that means the off-payroll working rules apply to you, and you’ll be expected to pay the correct rate of tax and national insurance. The HMRC has a tool you can use to check employment status for tax purposes.
If you get your IR35 status wrong, you may be required to pay backdated tax and national insurance, and you could also receive a fine on top.
Upcoming changes to IR35
IR35 has had a lot of attention in the news recently, because of some important impending changes to the tax rules, and because the changes have been delayed by one year, due to the coronavirus pandemic. The reform will now take place for the private sector in April 2021. IR35 reform already took place for the public sector in 2017.
So, what exactly is changing? Well, at the moment, the task of determining IR35 status falls to you, the contractor. But, when the reform takes place, the responsibility will lie with the client – at least those that are medium and large businesses. This means that fee-paying liability for IR35 also transfers to the client – which is a concern for them. Assessment will take place on a contract by contract basis, as it is now.
Read more about how the changes will affect you, as an intermediary.
What contractors can do to prepare
IR35 reform is a worry for many contractors. Some are starting to see the implications of the changes already, with their private sector clients deciding not to renew contracts.
From the client’s perspective, IR35 presents a challenge – they need to get to grips with the legislation and feel confident enough to carry the liability that goes with placing a contract outside of the rules.
There are some things you can do to influence IR35 status and to help your clients prepare for the changes.
1. Talk to your clients
If you’ve not heard from your clients about their plans for your contract post-April 2021, now’s the time to reach out to them. Together you can look at all the factors which determine IR35 status and hopefully agree on a strategy.
2. Review how your business looks to others
Make it clear that you’re not an employee in disguise – show your client and the HMRC that you’re running a business. That might mean increasing your client portfolio, taking out business insurance and getting a registered office address.
3. Review your rates
If you have clients that want to hire you but deem your contract as falling inside IR35, you might want to consider increasing your hourly rate or fixed-price project fee to offset the increased amount of income tax and national insurance you’ll have to pay.
Act now to protect your IR35 status
The government has made it clear that IR35 has merely been delayed and not cancelled. Come April, these changes will take effect, so it’s crucial you work with your clients sooner rather than later to get the best outcome for your existing contracts.
SkyTax offers expert advice and accounting services for contractors. Request a free consultation today.