IR35 legislation, commonly known as off-payroll legislation, has been in UK law since April 2017. It has been subject to reforms and tweaks over its few years on the books. A new set of reforms was announced for April 2020. However, due to Covid-19, these reforms were instead postponed. The Government has announced intentions to implement these reforms in April 2021. However, a significant number of the UK contracting community has expressed the reforms should be delayed. While a further delay may be applied to the reforms, it is important to know how this legislation works and what it means for your business. To make sure you are prepared for the upcoming changes, read on for Umbrella Options’ overview of IR35 regulations and reforms.
IR35 was introduced into UK law to combat “disguised employment”. This means it is illegal for contractors to work for a company as an employee without being listed as one. For example, an employee at a company may quit their job one day, then come back the next as a contractor doing the same work as beforehand. Only this time they are considered a contractor rather than an employee. This led to these contractors being taxed at a reduced rate, as contractors are open to certain tax advantages while taking on none of the associated risks and responsibilities. The HMRC noticed this loophole, and so the IR35 legislation was created.
IR35 legislation currently applies to contractors who work via their own limited company or with a client through intermediaries. Essentially, this refers to any method other than salaried employment with a company.
The rules set by IR35 legislation ensure that workers performing the same role as an employee. The only difference being their status as a contractor, will be treated the same as said employees regarding tax. This means that a contractor will be expected to make the same tax and National Insurance contributions as the employees of the company if they meet this description.
IR35 rules are applied on a contract-to-contract basis, with some being considered within the rules and others outside. Currently, it is the contractor’s responsibility to determine whether each contract is in accordance with the legislation. If you have a contract with a public sector client, it will be their responsibility to decide if you are working within IR35 legislation. They are also expected to communicate this decision to you. So you should contact any public sector clients that have yet to notify you.
Prior to the upcoming changes, the responsibility for deciding employment status fell on the contractors themselves. Once the new changes are rolled-out, this responsibility will be on the client that the contractor works for. This will make IR35 legislation interact with the private sector in the same way it does with the public sector. Some exceptions are being made for small companies.
In the event a client decides the contractor is working within the scope of IR35, taxation will be applied to the source of the earnings. The same way it would if the contractor was an employee of the company. While this does mean contractors will be taxed in the same way as employees, there will not be any changes to employment status. As such, there will be no entitlement to the rights and benefits typically afforded to salaried employees.
As these changes were expected to be implemented in April 2020, some businesses have already made decisions regarding how they will interact with contractors in the future. These include Lloyds, Tesco Bank, and Transport for London. Even if the reforms are subject to a further delay, these businesses, amongst others, may have already adjusted how they work with contractors to be compliant with the new legislation. If you are unsure, contact your prospective client and ask them if they have made any changes in anticipation of the IR35 reforms.
There has already been a 12-month delay to the roll-out of these reforms. Although it has been documented that a large number of self-employed people are not yet prepared for the changes – even with only a short time to go. While the Government may consider an extension to the delay, financial experts do not expect any further delays are coming. As such, it is highly recommended to begin making preparations if you have not already done so. Consider consulting a tax advisor or even the HMRC if you are unsure how these changes might affect you. Additionally, you should speak with your employment agency if applicable, and any clients you currently have to avoid any surprises.
We hope this article has been helpful and informative. If you need any clarification or have any questions that need answers, don’t hesitate to contact us at Umbrella Options.