Mention IR35 to any contract worker, and you will probably get an eyeroll in return. It has a reputation as one of the least popular pieces of legislation and has been compulsory for many contractors for the last 20 years. Two decades on, here is a look at what it means for you and your business and the changes on the horizon.
What is IR35?
IR35 was brought in to stop companies and individuals avoiding PAYE and National Insurance contributions. Some contractors were working exclusively for one company as a limited company or partnership themselves. This meant they were effectively working as an employee, but avoided PAYE and NI contributions, saving both sides huge sums of money.
The legislation was introduced to prevent this from happening, but the terms were so broad that many contractors who work honestly get caught out and find they have to pay more tax, as well as penalties.
Does IR35 affect you?
If you carry out contract work and you work mainly for one business, IR35 probably affects you. It is a small proportion of freelancers and businesses, but the financial implications can be huge.
Many of those looking to avoid paying taxes would issue dividends through their company, which does not require National Insurance contributions as a salary would. Studies carried out over the last 20 years suggest that the difference for a contractor earning £300 per day could be £10,000 if they are found to fall inside the IR35 band and are forced to pay tax.
If you are found to have been avoiding tax payments, you would also be liable to pay huge fines as well as back taxes.
Have there been any changes to IR35?
The first changes to IR35 in 20 years were due to come into effect in April 2020 but have been postponed to April 2021 due to the pandemic. At the moment, it’s up to contractors to determine whether or not they fall within IR35 obligations, but that’s going to change to become the responsibility of the contracting business.
If you use contractors, HMRC have put together some guidance to help you get ready for the changes. Some of the key points are:
- Check whether any contractors you currently use are supplying their services through a personal service company
- Use the HMRC Check Employment Status for Tax service to check if any contracts due to continue after April 2021 will fall into the IR35 requirements
- Ask your contractors directly if IR35 applies to them
- Sort out processes now to help when you take on future contractors, including who makes IR35 decisions within your business, and how contractors who fall within IR35 will be paid.
There is a lot more detailed information on the HMRC website.
The repercussions of these changes have the potential to have a huge impact on both contractors and businesses – contractors may find a significant change in their income, and businesses will have to deal with new processes and paperwork when they look to bring a contractor in.
If you need help understanding what the changes to IR35 mean for you and your business, get in touch with us by emailing hello@purplelime.uk.com, or calling us on 01249 263 333.