What is IR35? Everything you need to know about the tax coming to the private sector
After rolling out into the public sector in April 2017, HMRC’s controversial IR35 tax is set to hit private sector contractors in 2020.
And it promises to cost workers a big chunk of change: one estimate suggests contractors could pay 25 per cent more in tax.
Self-employed contractors are now grappling with the legislation, which is set to roll out next year regardless of the general election and delayed budget if the Tories win a majority.
With so many changes to how contracting , there’s plenty you need to bear in mind to avoid being stung by IR35.
Read this article to find out everything you need to know about IR35’s arrival in the private sector.
Read more: IR35: Meet the ‘damaging’ new tax set to hit self-employed workers
Read more: Revealed: The towns that pay the most tax are almost all in the south east
What is IR35?
The Intermediaries Legislation – or IR35, as it is now known – first came into force in April 2000 to prevent workers from “disguising” themselves as freelance contractors as a way to pay less tax.
Former chancellor Philip Hammond resuscitated the legislation in November 2016, as a way to generate extra HMRC income by introducing it in the public sector.
The anti-avoidance legislation targets contractors providing services through a limited company, when in practice they are doing the same work as employees.
In HMRC’s eyes, if a service provided by a contractor resembles full-time employment, the contractor falls under IR35 and should therefore pay tax like a full-time employee.
However, it does not recognise the loss of full-time employment benefits a contractor must account for such as sick pay, parental leave, and holidays.
What are the IR35 changes?
In 2017 the government made changes to IR35 for public sector contracts to make the employer responsible for determining whether a contractor falls within IR35 or not.
For private sector contracts, up until now the contractor was responsible for determining whether they fall within IR35.
However, the off-payroll working rules are being extended to include the private and voluntary sectors in just six months’ time.
Under the latest IR35 reforms, private sector employers will now be responsible for assessing whether or not contractors need to pay income tax and national insurance contributions.
Read more: These were the six best players at the Rugby World Cup
What does it mean to be inside IR35?
If you’re deemed to be inside IR35 then for tax purposes, HMRC considers you to be an employee of your client and therefore liable to pay the same PAYE tax as an ordinary full-time employee.
Nigel Morris, employment tax director at MHA MacIntyre Hudson, sets out seven areas that make it likely you’re inside IR35:
- The nature of the duties being undertaken – is the job one that you would expect to be done by an employee? Does the end user have employees performing similar roles? If so, this makes it more likely the PSC falls under IR35 rules.
- Substitution – does the provider of services have the right to send a substitute to carry out the role? Numerous court and tribunal cases have established that where a true right of substitution exists the arrangement is unlikely to be one of employment.
- Mutuality of obligation – is the provider of services obliged to accept work offered by the end user? Where the individual has the right to turn down work offered by the end user this is more indicative of self-employment, though HMRC is currently disputing this generally-accepted interpretation.
Read more: Goals Soccer Centres warns HMRC black hole could be higher than £12m
- Supervision, direction and control – how much control does the end user have over the manner in which the provider carries out the role? If the level of control is considerable this means the providers are more like employees and makes it more likely you’ll fall under IR35.
- Integration into the business – to what extent is the role an integral part of the business? Does the provider present themselves to customers as representing the business? Does the provider have managerial responsibilities within the business? Again, if they do, the individuals working through limited companies are behaving more like employees.
- Is the worker in business on their own account – does the worker bear financial risk in the performance of the duties? Who supplies any equipment required for the role? If they do bear financial risk, or provide their own equipment, they are less likely to fall under the scope of IR35.
- Is the provider entitled to employee benefits such as pension contributions, paid holidays, sick pay? Obviously, if they are, they are being treated like employees and are more likely to fall under IR35 rules as a result.
Read more: City chiefs hit back in wake of Corbyn criticism
When will IR35 come to the private sector?
From 6 April 2020 how the rules are applied will change.
“As things stand, the changes are still set to take effect from April 2020. The legislation is currently in draft form and some guidance has been provided,” says Stephanie Wilson, national head of employment tax at BDO.
She adds: “Royal assent is likely to take place when we have a Budget and Finance Bill, which is unlikely to happen until the year new.”
However, Dave Chaplin, boss and founder of Contractor Calculator, which provides advice for self-employed workers, says: “With the Budget cancelled and an election on the horizon we simply don’t know what will happen. It depends who gets into power. It’s not popular.”
Why is it controversial?
“In a nutshell, from next April, contractors will not be able to set their own tax status unless they are engaged by a ‘small’ private sector company. This duty will fall on the medium or large business they are engaged by,” says Seb Maley, the chief executive of IR35 adviser and insurance company Qdos Contractor.
Maley adds: “This has left contractors fearing the worst. They worry that private sector businesses – like many public sector bodies – will take a risk-averse approach to IR35 reform and unfairly place them inside IR35.”
Last month recruitment giant Hays found that a third of private sector organisations that engage temporary contractors were unaware of the changes to IR35.
It also found less than half (43 per cent) of medium and large private sector organisations who engage contractors have begun preparing for the changes.
Read more: HMRC collects almost £10bn via tax probes
Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed, said: “It is clear the government has done nowhere near enough to prepare businesses and contractors for the changes to IR35 next April. Not only do a third not know anything about them; those that do are extremely concerned – and with good cause.
“The nightmarish complexity of IR35 will result in significant extra administrative burden and cost for hiring organisations. Compliance with the rules is clearly going to be an uphill struggle for businesses across the UK.”