If you own a business in the UK or employ workers or contractors who live there, you might be curious about how IR35 will impact you and your team members. We did the research for you and here’s what you need to know:
What is IR35?
IR35 or intermediary legislation describes two sets of tax legislation that are designed to combat tax avoidance by workers, and the firms hiring them. It is aimed at those who are supplying their services to clients via an intermediary, such as a limited company, but would be considered an employee if the intermediary was not used (and the contractor was hired directly by the company).
The rules make sure that these workers pay broadly the same tax and National Insurance contributions as employees. If a contractor is caught misclassifying themselves it could cost them up to 25% of their income in additional taxes.
IR35 has actually been in place since April of 2000 but has faced criticism for how it was rolled out. The law has been updated and on April 6th, 2021 the way the rules are applied will change.
How does IR35 impact independent contractors?
IR35 can apply if a worker (sometimes known as a contractor) provides their services through their own limited company or another type of intermediary to the client.
An intermediary is usually the contractor’s own personal service company, but could also be any of the following:
- a partnership
- a personal service company
- an individual
Until 2017, these contractors were responsible for determining their tax status under the IR35 legislation (either inside or outside of IR35). Then, legislation reform in the public sector gave responsibility to the end client for determining whether an assignment fell inside the IR35 legislation or outside, removing the burden from contractors.
The Finance Bill of 2019 contained plans to extend IR35 obligations to end-users in the private sector. In spite of lobbying, industry contention, and a delay in implementation as a result of the Coronavirus pandemic, the IR35 reform, also known as the off-payroll working rules, will go into effect in April 2021.
From this point on, the responsibility for deciding whether a contract or assignment falls inside the legislation will mostly shift from the limited company to the end client for contractors working for medium and larger businesses. If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply. For the purposes of this law, small businesses are defined as those that meet two of the following three criteria:
- Under 50 employees
- Gross assets of less than £5.1 million
- Annual turnover of less than £10.1 million
Once the contractor (or intermediary) has determined that they are inside of IR35, they will need to pay the appropriate taxes as if they were an employee. This does not actually make the contractor an employee. This classification does not entitle the contractor to other employment benefits like paid time off.
If a contractor is found to be avoiding paying taxes after these laws go into effect they will need to pay all back taxes and penalties - as will their employers. One caveat is that in 2021 the UK government announced it would not enforce penalties for accidental offenders taking “reasonable care” to remedy the situation. They will however go after employers who are consistently and intentionally violating the laws.
What is an SDS and how are they produced?
Companies under IR35 are required to produce a Status Determination Statement (SDS) for each contractor.
This document goes from the company receiving the service to the agency (if applicable), then through the intermediary, and finally to the individual contractor.
The SDS must include information on the decision regarding the contractor’s status as either inside or outside IR35, plus the company’s reasoning for the decision. It also needs to include evidence of reasonable care in deciding.
If a contract is changed in any way, a new SDS must be produced for the contractor. This will help determine whether the contractor’s status has changed under IR35 as a result of the change in contract.
Should a contractor disagree with their SDS, they may appeal. It can be verbal or in writing and they have 45 days to make the appeal. The company then has 45 days to respond. This response will either be a new SDS or written notice as to why the company is upholding its initial decision.
When it comes to taking reasonable care to determine a contractor’s status inside or outside of IR35, employers can use the CEST. This is an online tool created by HMRC (Her Majesty's Revenue and Customs) that presents a series of questions to help businesses determine the status of contractors and employees for tax purposes.
Panther's here for you.
If you have concerns about your contractor’s requirements under the new laws (post-April 2021) we are here to help. These laws were designed to close a tax loophole, not make hiring talent in the UK more difficult. In fact, it could encourage you to promote your contractors to employees which, with Panther, is an easy task to accomplish.
Contact us today to schedule a demo and learn how we can help you stay in compliance.