IR35: What You Need to Know
IR35 (also known as off-payroll rules) was introduced for the public sector way back in 2000 and will be coming to the private sector in April this year. HMRC uses the off-payroll rules to correctly identify the employment status of contractors. This is to avoid the practice that had become quite common of contractors actually being what they called ‘disguised’ employees to avoid paying tax and NI contributions.
What to expect
As we already mentioned, IR35 has been in place in the public sector for some time, but it will now be applied in the private sector from April 2021. While contractors have previously been responsible for determining their employment status, this responsibility now shifts to the. In addition, once a company has determined the employee’s status, the busines must inform the contractors of their status decision using a Status Determination Sheet and include the reasons that have led them to their decision. Contractor’s will have the right to dispute any decision they disagree with.
This may seem like a new added burden, but small businesses are exempt. If your business falls into the criteria of small business, then the responsibility of determination remains with the contractor.
Criteria for being a ‘small business’
You must meet two of the criteria below, over two consecutive years, to be classified as a small business. You can find this on HMRC’s website as well.
- Your annual turnover should be no more than £10.2 million
- There should be not more than £5.1 million on the balance sheet
- The business employs no more than 50 employees.
Is it IR35 or Not?
If your business does not meet the criteria, then you must become familiar with determining when a contract falls under IR35 and when it does not. You can use HMRC’s tax calculator to determine status and it can be quite complicated, but there are a few areas that give you a good idea of whether a contract falls under iR35 or not.
- Control and direction. If the client controls where and how the contractor works.
- Substitution. If the contractor cannot provide a substitution (i.e. they can only do the work themselves), that implies they might actually be an employee.
- Mutuality of Obligation – This means that the employer expects the contractor to take the work on when asked and equally, the worker expects that ongoing work will be supplied.
- Equipment – whether the contractor supplies their own equipment, or uses their client’s equipment.
- Payment – Is the contractor paid by the job or project? Or do they receive an hourly or daily rate?
Let us know if you have any worries or concerns about IR35 and whether it applies to you either as a business or a contractor. We’re always here to help.