The long-anticipated wait for the IR35 reforms to take effect is nearly over. After a delay of a year due to the COVID-19 pandemic, the 6 April is fast approaching, and the new legislation will undoubtedly change the working landscape for employers and contractors alike for good.
What exactly is IR35?
IR35 is the technical term, coined in 2000, for the off-payroll working rules, used to determine whether a contractor is a ‘true’ contractor working on a freelance basis, and therefore paying taxes as a self-employed individual, or if they should be on the company’s payroll and instead be adhering to the tax rules which work alongside the PAYE system.
IR35 was initially set up in the public sector to crack down on tax avoidance fraud. Contractors were finding loopholes to avoid paying the correct amount of tax by disguising themselves as employees yet reaping the tax benefits of self-employed status. This is a serious issue within the private sector too, hence the need for the reforms.
What does the new legislation mean?
If you are a private business that hires contractors operating as Limited Companies, the responsibility now falls on you to assess whether these workers fall inside or outside of IR35.
If they fall inside of IR35, this means that they are viewed as an employee, and must adhere to the tax regulations as others on the PAYE system. For those outside IR35, they are operating as a genuine business, working on a self-employed basis.
Contractors will be given a Status Determination Statement by their employer but, an employer's word may not be final – contractors can dispute the decision disagree with the outcome.
How do you determine if someone is inside or outside of IR35?
As explained by our IR35 expert, Caterina Glenn, determining a contractor’s status will include asking questions such as:
- Does the contractor have right to provide a substitute worker to perform the duties?
- Does the contractor fall under the direct control of the company – are you dictating what and how work is carried out?
- Will you be providing consistent and paid work – is the contractor obliged to accept this work?
- Is the contractor able to work with other clients?
- Will you provide equipment for the contractor to use?
- Would the contractor be seen to be part of your business? – Would they be integrated into your current business and teams?
- Would the contractors have their own ID Badge?
- Would the contractors have their own email with a business email address?
- Would the contractor be entitled to benefits such as holiday or sick pay?
What do I need to do in the next month?
The events of the past year have meant a lot of businesses aren’t ready for the IR35 reforms. In fact, it has been reported that over half aren’t ready for the changes which are coming in imminently. Sadly, not only does this mean businesses are feeling incredible amounts of stress to meet the April 6th deadline, but they have turned to drastic measures in order to avoid penalties for getting it wrong. It has been reported that 41 per cent of companies are imposing blanket bans on hiring Limited Companies and 32 per cent of contractors have had their most recent contracts terminated because of the IR35 reforms. A huge blow to the jobs market.
Thankfully, since these figures were released, the government has said they will now be introducing a soft launch to the IR35 reforms, meaning any companies found to have non-purposeful mistakes on their IR35 reporting across 2021/22 will not be penalised. A big weight off many shoulders.
However, if you find yourself within the 50+ per cent of companies not yet prepared to tackle the reforms, here a couple of things to ensure you get on top of the reforms in time.
Carry out or finalise a full audit of all your contractors
If you are continuing to hire contractors after the 6th of April, ensure you have completed a full audit, entering the new tax year with all your ducks in a row. Having a completed audit will ensure you are aware of, and on top of, any tax payments that need to be made. This audit should also include knowing which contractors fall inside and outside of IR35 and, therefore, the tax payments you need to make each month.
Be sure to ask for help if you need it
The nuances of IR35 are incredibly complex and can create a headache for any business. With only a month to go, now is the time to seek help if you still need it. Don’t just reply on Google or help guides - if you’re truly stuck and don’t know which way to turn, gather in-depth advice from a specialist.