IR35 - are you in or are you out?
April 6th 2020 sees the expansion of IR35, a piece of tax legislation which determines whether a worker is employed or self-employed.
IR35 allows HMRC to collect additional payment where a contractor is an employee in all but name. If a contractor is operating through an intermediary, such as a limited company, and but for that intermediary they would be an employee of their client, IR35 kicks in.
As of 6th April, medium and large sized private sector businesses hiring individual service company contractors will be responsible for determining the IR35 status of these contractors. The changes follow similar rules regarding 'off-payroll' workers in the public sector which came into force in 2017. This will now mean that the responsibility for determining status will shift from the contractor to the hiring organisation.
So, for those companies it is important to take steps to understand the contractor workforce from an IR35 perspective, before it comes into effect.
With much of the future of the workplace being project based, the financial infrastructure within your business needs to be in position to help you manage the reform. GSM can help you put all the financial controls and processes in place to help you do it well.
From an individual contractor perspective It's important to remember that each assignment needs to be assessed individually and if HRMC deem your contract for these to be inside IR35 then the rules will apply.
To be 'inside IR35' means that you are considered, for tax purposes, an employee of your end client and therefore subject to PAYE.
To be 'outside IR35' means that you are operating as a genuine business, and therefore operating outside of the IR35 rules. If you are operating 'outside IR35', you are able to pay yourself a salary, draw the remainder of income as dividends, and remain responsible for your taxes as usual.
So who decides whether you're in or out?
From April 6 the responsibility will lie with the end-client, whereby IR35 requires them to make an extra payment to compensate for the additional tax and NI that HMRC would have received on an equivalent employee's wages. So, from that point on, like the public sector, these businesses will now have to determine whether the contractor falls inside or outside IR35.
The rules can be difficult to understand. HMRC use 3 key criteria to determine IR35 status…
Does your client determine what you do and how, when and where you complete your day to day work?
- Personal Service:
Are you required to carry out the work yourself, or can you send someone in your place?
- Mutuality of Obligation:
Is your client obliged to offer you work and are you obliged to accept it?
Answers “yes” to these questions will indicate a quasi-employment relationship.
If you are unsure whether you fall within IR35, then you're going to need to demonstrate that these factors don't apply to both your contract and your working practices.
Less than one in ten (7%) of the UK's freelancers say they are fully prepared for new tax rules due to come into force in April, according to new research from freelance career platform UnderPinned. The looming IR35 deadline is a major cause of concern for the UK's rapidly growing population of freelance workers, currently numbering more than two million. According to UnderPinned's research, two in five (42%) have never heard of IR35, and one in three (32%) say the new rules are too complex and they do not understand how they will be affected. Together, that's three quarters (74%) of freelancers who have no idea how IR35 will impact them.
If you need help to determine your status, GSM can help you with a review of your working practices to identify whether you are in or out.
In summary, it is important for both parties to understand their rights and obligations under the new rules. GSM takes a balanced, prudent approach for each, taking the time to assess IR35 status, which could otherwise massively impact on your business.
Don't delay, arrange an IR35 consultation with one of our Partner-led teams today on 020 7935 3793