New IR35 tax changes came in to force on the 6th of April 2021, which will see thousands of private-sector contractors pay more tax.
IR35 or "Off-Payroll Working" is a term given to someone either in the public or private sector, sometimes known as a Contractor, who provides services through their own Ltd Company, Partnership, Personal Service Company or provides services as an individual.
The rules apply to those, who would otherwise be considered as employed by the person or company they provide services to.
IR35 ensures that the income received is treated as though it was earned as an employee, and is charged broadly the same Tax and National Insurance contributions on their earnings as someone who is employed.
Up until 6th April 2021, the End Client, or engager in the public sector was in charge of assessing whether someone is classed as an off-payroll worker, and for the private sector, most contractors would self certify their status. However now the same certification rules apply to those in the private sector also for those providing services to medium or large private sector clients. However, if you provide services to a small client, you remain in charge of certifying your IR35 status.
Who is affected?
Any worker who provides their services either through an intermediary, a client who receives services through an intermediary or an agency who provide workers services through their own intermediary.
How to check if I fall under IR35?
There's a few tests that will establish your IR35 status but the main ones are:
- Who has control over the work that's completed?
If the company you provide services to can dictate the hours you work or the location you work at that's a good indication IR35 applies.
- Mutuality of Obligations
In other words, once your work is completed, are they required to find more work for you.
- Could someone else take your place?
If for whatever reason you were unable to attend work, could you, and would you be allowed to appoint a replacement worker.
Even if you believe you meet the above tests to fall outside of IR35, in most cases it will be up to the end client to determine your status, and if they consider you to be an off-payroll worker, there's very little you can do about it.
There is a possibility that some companies will cease to take on any new contractors as a result, in some small cases, the companies may decide to employ the contractor instead.
Why would an end client be reluctant to continue accepting services from a contractor?
Well simply put, if they get it wrong, there could be heavy penalties. The end client would be responsible for not only deducting tax and national insurance but would also have to pay Employers national insurance contributions as well.
Why will the contractor pay more tax?
Working through your own Ltd Company, you have the flexibility to reduce the tax you pay on your income, for example, you may decide to pay a minimal salary, which would be tax-free, and take the rest as dividends which attract a lower rate of tax compared to income tax.
IR35 ensures that all income is taxed in the same way as if you were employed while also ensuring that Employers National Insurance contributions are also paid. Therefore any tax savings you made previously will be wiped out under the new rules.
Can I challenge an IR35 determination?
You can, but there's very little you can do if the determination is upheld. What you can do, is determine your status yourself, provide the information to the end client, and try to convince them that their determination is wrong. In some cases, they may agree.
You can also try providing evidence from an independent expert, this would hold more weight than determining the status yourself.
Is there a way to avoid IR35?
In some cases you could work via an umbrella company, these companies don't apply to IR35, but they can come with heavy fees, so you will need to consider them very carefully.
If you currently operate a Ltd Company or provide services as an individual, and have been caught by Off-Payroll Working, you will most likely need to consider closing your company or ceasing to trade as Self Employed, there are steps involved to close your business such as preparing final accounts and submitting applications to strike the company off the register.
If you are unsure how to do this, and require help, why not contact us today.