What is IR35? And how are the rules changing?

Posted by Tilt Recruitment on March 18th, 2021

What is IR35? And how are the rules changing?

Posted by Tilt Recruitment on March 18, 2021

Are you up to speed on the new IR35 rules coming in April 2021? If you’re self-employed, you need to be – so read on.

What is IR35?

IR35 is a set of rules to assess whether contractors are really contractors or “disguised” employees. This matters because it affects how you pay tax.

Contractors working through their limited company pay tax at a lower rate, so some workers and companies try to dodge tax by passing what’s basically an employer/employee relationship off as self-employment.

HMRC introduced IR35 in 2000 to tackle this. It’s basically an employment status test. If your contract falls “inside IR35”, HMRC will count you as an employee, and you and your employer will be liable for Income Tax and National Insurance. If it falls “outside IR35”, you’ll be counted as a bona fide contractor. However, the rules are complex and open to interpretation.

Intermediaries

IR35 rules apply if you “would be an employee if there was no intermediary”. Your intermediary is often your own limited company (also known as a personal service company). But another personal service company, a partnership or an individual can also count as an intermediary.

Rather than providing your services directly through an intermediary, you might also be working through an employment agency or an umbrella company.

What counts as inside IR35?

IR35 tests are mostly based on supervision, direction and control. HMRC offers an online testing tool, CEST (short for “check employment status for tax”) and an IR35 helpline to help you determine your status.

But in reality, your IR35 status also hinges on employment legislation and case law – and CEST fails to take a vital piece of case law called “mutuality of obligation” into account, so it may not be the most reliable guide.

Who determines IR35 status?

In 2017, public sector organisations became responsible for working out their contractors’ IR35 status. Until now, contractors in the private sector have been responsible for working out their own. In April 2021, that responsibility will shift to the organisations using the contractors’ services.

The organisation you work for will have to decide your status and give you the reasons for their decision in a Status Determination Statement. You can dispute this decision if you disagree.

Small businesses will be exempt (so if you work for a small business, you’ll still have to determine your own status.) A business counts as small if it meets any two of these criteria for two financial years:

annual turnover £10.2 million or less
balance sheet £5.1 million or less
50 employees or fewer

Businesses have to demonstrate that they took reasonable care in working out your IR35 status, or HMRC will hold them responsible for any mistakes.

To make sure you’re prepared for the changes, you should talk to your clients about your current contracts, and also work out which clients will count as small businesses. Here’s a checklist to see if you’re IR35 compliant.

Am I IR35 compliant?

The main things to check are these three:

Supervision, direction and control – does your client act like a manager? If so, you could be inside IR35.
Substitution – can you send someone else to do your work? If not, you’re likely to be inside IR35.
Mutuality of obligation (MOO) – is your client obliged to offer you work and are you obliged to accept it? If so, you could be inside IR35.

Other factors include:

Equipment – if the client provides your equipment, you might count as an employee.
Financial risk – if you’re genuinely a self-employed business owner, you take the financial risk of your own errors and fix them on your own time.
Payment on a project basis – self-employed people get paid per project, employees get paid a regular wage.
‘Part and parcel’ of the organisation – if you’re on the company org chart or have people reporting to you, you might count as an employee.
exclusivity – if you only ever work for one client, you might count as an employee.
intentions of the parties – if you have a business website and/or your own dedicated office space, you probably count as self-employed.

Take this opportunity to discuss your contracts with your clients and reword them as necessary to reflect your contractor status, but remember the contract has to describe your working practices honestly.


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