Changes to IR35: A guide for Contractors

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If you’re currently operating as a contractor — or employ contractors to help your business carry out any of your operations — then you’ve got a couple of inherent tax considerations to bear in mind. But none of those considerations are more critical than the UK Government’s IR35 legislation.

For those unfamiliar with IR35, it’s simply another name for the UK’s set of rules that apply to off-payroll workers. Its purpose is to assess whether a so-called “contractor” is actually a real contractor instead of a disguised employee.

Why would a company try to disguise some of its employees as contractors?

Simply put, contractors are self-employed individuals. As a result, they aren’t going to appear on a company’s payroll. That means the company won’t be paying National Insurance contributions or provide any statutory benefits like annual leave or sick pay to those workers.

This saves employers quite a lot of money in tax contributions — but it also typically lowers a contractor’s tax contributions, too.

Where a contractor’s work with a company is genuine and project-based, this isn’t a problem. But if companies abuse these protocols, the UK Government has the potential to lose out on a huge amount of tax revenues that are being illegally avoided by companies mislabelling their employees.

That’s where IR35 comes in.

This legislation came into effect in 2000, and it includes a set of assessments and rules companies have got to follow to ensure that contractors are paying the exact same tax and National Insurance contributions that full-time employees are going to be expected to pay.

But in 2017, new reforms came into force that drastically changed how organisations and contractors were obligated to respond to the rules. On 6 April 2021, those reforms were then extended further still to include a broader range of both public sector and private sector companies.

This guide explains what has changed about IR35 legislation, who these changes apply to and how you can ensure that your organisation is fully compliant with IR35 off-payroll rules.

What has changed about IR35?

The IR35 rules have evolved several times since they were introduced in 2000 — and starting from April 2021, the focus on responsibility has shifted from contractors to the organisations that are hiring them.

The key change to IR35 rules for 2021 that companies have got to be aware of is that medium-sized and large businesses are now going to be the ones that must assess and classify a contractor’s employment status. This is no longer the responsibility of each individual contractor.

In line with this added layer of responsibility for corporates, each organisation must then provide the contractor in question with the reasoning behind their classification using an official Status Determination Statement (SDS). This statement has got to include the specifics on why the decision was made — and if a contractor disagrees with the SDS, they are entitled to dispute it.

It’s important to note that small businesses are going to be exempt from the IR35 changes in most instances. To help contextualise the changes and which organisations they’ll apply to, we’ll quickly break down the eligibility requirements and exclusions.

Which companies do the IR35 changes apply to?

This year’s IR35 changes apply to large and medium-sized businesses in the private sector that are considered the “end client” of a worker’s services — as well as “fee payers”.

For reference, a fee-payer is simply HMRC’s way of describing parties that are responsible for paying a worker’s limited company or another intermediary for that individual’s services. In most cases, this is probably going to be an employment or recruitment agency.

If you’re unsure whether your business is considered large or medium-sized, the UK Government has decided to use the same criteria implemented in the Companies Act 2006 in order to assess the size of an organisation. That means the IR35 changes will apply to your business if two or more of the following features apply:

  • Your business has a turnover of more than £10.2m
  • Your business has a balance sheet total of more than £5.1m
  • Your business has 50 employees or more

Companies that don’t fulfil at least two of these eligibility requirements should be exempt from the IR35 changes — although when in doubt, organisations should check with HMRC to clarify their status.

Where a company is exempt from the IR35 changes, it means that the contractor working with a small business will be responsible for assessing their employment status. The responsibilities expected of small business owners should remain unaffected by the 2021 changes to IR35.

Again, it’s important to note that the off-payroll changes will apply to workers that provide services through a fee-paying intermediary like a Personal Service Company (PSC).

If a contractor provides services through a PSC and would be classified as an employee had they been contracted directly with that client, the responsibility will now shift from the contractor to the fee-payer or organisation benefitting from that individual’s work to properly assess and report on their employment status.

From April 2021, all those affected organisations have got to determine whether each individual employee or contractor is “inside IR35” or “outside IR35”.

If your company is based overseas, then you should note that the off-payroll working rules do not apply to your business. Instead, the worker’s intermediary (which will usually be a limited company) will be the party responsible for determining whether the IR35 rules apply.

Let’s explore precisely how that decision is made, and what eligible organisations have got to do in order to demonstrate their compliance with the changes to IR35.

How do you make sure your company is IR35 compliant?

If your organisation fulfils the eligibility criteria, it will now be your responsibility to determine the employment status of every worker who performs services for your company — either on their own or as part of an intermediary like a recruitment agency.

That determination has got to be communicated with all relevant parties using a Status Determination Statement (SDS).

Each SDS must be given to both the worker and the organisation (if relevant) that you are in contract with. The statement needs to include details of your conclusion on the individual’s employment status, and your company’s reasoning behind the decision.

In your SDS, you must demonstrate that you’ve taken reasonable care in making your determination.

After assessing the employment status of your contractors and reporting those statuses using an SDS, it is then your company’s legal responsibility to keep up-to-date records on all of your employment status determinations. These records absolutely must include the reasoning behind the determination, as well as details of any relevant fees or payments made.

In addition, companies that must adhere to the IR35 changes will now be expected to have reasonable processes in place in order to address any disagreements that stem from a status determination. Contractors have the right to contest an SDS if they wish, and so it’s important that you have protocols in place to fairly and efficiently address these concerns.

If you’re the fee-payer for a contractor, it will be your responsibility to deduct and pay Income Tax and National Insurance contributions to HMRC on that individual’s behalf.

Once more, just to be clear: if you are a small private sector company, you will not be responsible for deciding the employment status of workers. This is the responsibility of your contractors or the workers’ intermediary. The only element of IR35 changes that will apply to you is that, if asked, you must disclose to a contractor or intermediary how big your company is.

This will help them to confirm their own responsibility for assessing and reporting on the employment status of an individual.

Be prepared

At the end of the day, the recently implemented changes to the IR35 off-payroll rules aren’t going to impact a huge proportion of the UK’s corporate population in terms of the regulatory responsibilities they must uphold. After all, the vast majority of the UK’s business ecosystem comprises small limited companies and sole traders.

But because many of these sole traders do work as contractors with larger businesses and big corporations, it does mean that quite a few workers operating in the UK will now benefit from one less regulatory responsibility with which they must comply moving forward.

Above all else, it’s important for companies and contractors of all shapes and sizes to be proactive about changes to IR35. More important still, they’ve got to be aware of how they are or are not impacted by off-payroll rules. It’s critical that, when in doubt, organisations contact HMRC or an accounting professional in order to clarify their responsibilities and rights.

Want to learn more about limited companies and regulatory responsibilities?

Check out the Linnear COSEC knowledge centre to ensure that your business stays up-to-date on all the latest industry news, or get in touch to find out how our company secretarial services can drastically reduce your costs and free up your time to help you focus on running your business.

About the author

Nicholas joined in 2018 to set up the Company Secretarial Department in the group’s company formation divisions. After establishing the department, he was a key stakeholder in the development of Linnear CoSec. Prior to joining the group, Nicholas worked in a variety of client-facing positions at an international provider of corporate services, caring for a diverse portfolio of companies. He is a Chartered Secretary and Governance Professional, and holds a bachelor's degree in Politics as well as a Masters in Corporate Governance.

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