IR35 in the private sector – get ready for April 2021
30th September 2020
If you’re a contractor you’re likely to have heard of IR35. It previously only applied to the public sector but after several delays to the timetable, the Finance Bill made it clear that the rules will also apply to the private sector from 6 April 2021.
IR35 – the basics
For the uninitiated among you who are wondering what this four letter/number combo is and why you should care, IR35 is the shorthand for what’s officially called the Off-Payroll Working Regulations.
The rules were created to stop contractors avoiding the tax liabilities of being an employee by working through a limited companies or umbrella company.
We wrote a blog about IR35 a few years ago, so you can read a bit about the background and basics in that.
IR35 in the private sector
From 6 April 2021 medium and large companies will be responsible for making an assessment of whether or not a contractor or freelancer falls within IR35. They should use the HMRC Check Employment Status for Tax (CEST) tool. Small companies – as defined by Companies House – will be exempt from the rules.
Medium and large companies are defined as having two of more of these features:
- a turnover of more than £10.2m
- a balance sheet total of more than £5.1m
- 50 employees or more
Before 6 April 2021 it is the responsibility of the freelancer or contractor’s company to make a decision about whether the assignment is within or outside of IR35.
How is IR35 status decided?
The way contracts are assessed is complicated, but it’s worth knowing a few of the key factors which would mean you would fall within IR35.
- Your workload is dictated by your client, not by you – known as control and direction
- Only you are able to do the work, the client wouldn’t accept a substitute of you were unable to do the work – referred to as substitution
- You work for the client on an on-going basis with an expectation of more work every time you finish a project, and the client expects you will continue to work for them – known as mutuality of obligation
Other things that will be taken into account are whether or not you work for multiple clients, whether you have an office and market your business, whether you use your own equipment or a laptop/PC provided by the client, and how you are paid – whether hourly/daily or by the project. But even getting all of these things right could still mean a specific contract would be deemed within IR35.
The disadvantages to contractors of IR35
If you are asked to do a contract which is deemed by HMRC’s CEST calculator to be within IR35 then you can still work through your limited company, but the client will take tax and employee NI from your invoice total as if you were an employee. They will also have to pay employer NI contributions.
This is costly versus paying 20% Corporation Tax on profits but also creates a situation where you are taxed as an employee, but you have no employment rights. If you were put on to the payroll you’d acquire holiday, be entitled to sick pay and potentially pension contributions, but none of these are automatically afforded to you if you’re working with IR35 through a limited company. This begs the question of whether you’d be better asking to be put on payroll.
If your company employs contractors or freelancers you need to start preparing for the changes to IR35 coming in April 2021. If you are a freelancer or contractor, it’s worth trying to understand the potential impact the changes will have on your income. Ultimately there’s little anyone can do to avoid IR35 in the private sector, you just need to get ready for April 2021.
As usual, if you need advice about your specific situation, give your usual TLC contact a call.