Rolled out to the private sector in April 2021, IR35 was introduced to combat tax avoidance by workers, firms and suppliers.
If self-employed workers and the firms which hire them aren’t following the IR35 rules, it can have financial and legal implications. Here’s what you need to know.
The basics
IR35 is a set of regulations designed to stop self-employed workers from reaping the tax benefits of an employee.
If a self-employed person works for a single employer for a long period of time, through an intermediary such as a limited company, they can be treated as a ‘deemed employee’.
Deemed employees must pay the same income tax and National Insurance as employees, as if they were paid through PAYE.
Originally introduced in April 2000, IR35 underwent a reform in 2017 for the public sector, which saw the responsibility for determining workers’ employment status shift from the worker themselves to the organisation hiring their services.
Private medium and large businesses which hire workers through an intermediary now have to work out whether their contractor should be considered self-employed or employed under IR35, using set criteria.
Control is whether the employee is under direct supervision of their employer. Someone who is truly self-employed will have more freedom and control over how they carry out their work.
Substitution is another main clause which affects IR35 rules. If the worker can be substituted by another, this is a sign of self-employment. The employer will be liable to pay fees for finding and hiring a substitute worker.
Payment basis will help HMRC determine whether a worker is inside or outside IR35 rules. Self-employed workers tend to be paid on a day-to-day basis rather than an hourly rate.
More information on the HMRC’s criteria can be found on its website.
There are two main terms to describe someone’s status under IR35 – inside and outside. Here are the differences.
Inside IR35
People who are ‘inside IR35’ are seen by HMRC as employed for tax purposes. If you’re found to be inside IR35, you’ll need to make sure you’re paying the right amount of tax.
A ‘deemed payment’ will need to be made to HMRC, accounting for the extra tax and NI which is due.
Your IR35 status must be reassessed if you decide to change your working practices and/or when you begin a new contract.
If you and the business contracting you haven’t paid the right amount of tax and NICs, you will both be liable to HMRC.
If you work in the private sector, as per off-payroll rules, your employer will determine whether or not you are inside IR35. If they don’t provide the right information to HMRC they will be billed accordingly.
Outside IR35
If you are working outside IR35, you are operating as a legitimate contractor and being paid by your limited company outside of IR35 rules.
This means you will be solely responsible for making sure you are paying the correct amount of tax and NI on the money you are paid.
You will not be registered through PAYE with your current employer.
Don’t get caught out
If you are ever unsure whether you are meeting HMRC’s requirements, talking to your accountant is the best way to make sure.
The expert team at Dunkley’s are well-versed in all matters relating to IR35 and can provide useful tax advice.