Understanding IR35 and What it Means

For those individuals who work as contractors or are thinking about becoming contractors and those who have businesses that hire contractors, IR35 is something you need to know about. However, there have been some changes to the legislation around IR35, which has led to some confusion. This is not least because the proposed changes were delayed as a result of the coronavirus pandemic.

For those contractors who are self-employed and work through a limited company, there are tax advantages that it is possible to take advantage of; however, the change in the rules around IR35 means that how this is done has changed. IR35 is in place to ensure that contractors who work to the same conditions as those employees who are part-time or permanent full time pay the same national insurance and tax to crack down on avoidance of taxation.

What are the rule changes?

As a recruitment specialist, Agile Recruit has been asked quite a lot recently what these new rule changes are, and they were only too happy to explain. The rule change governing IR35, which came into force in April 2021, has been implemented to align the rules for private and public sectors.

When IR35 was first put in place in 2000, every contractor was responsible for assessing their status for IR35 purposes; it was the responsibility of an individual’s agency or limited company to account for any National Insurance and tax that was due in cases where IR35 was applicable. This rule was then changed in 2017 when it became the responsibility of any public sector body employing a contractor in the public sector to ensure that IR35 was correctly implemented. In the private sector, the responsibility for doing this was still the job of the contractor.

The rule change in April 2021 ensured that the responsibility for setting the status of IR35 and paying the relevant tax was passed from the contractor to the private sector business that was employing them. This change effectively meant that irrespective of which sector, public or private, a contractor works in, the responsibility for IR35 lies firmly with the company employing them. Therefore, the “engaging” business is held liable in any case where HMRC determines that status has been assessed incorrectly.

It is important to note that these IR35 changes in the private sector exclude any “small” businesses. This means that the contractor themselves will continue to be responsible for setting their own IR35 status even after the changes.

What does this mean for workers in specific roles?

Any changes can be confusing, not only for the contractors but also for the businesses that might be employing them. Neither party wants to take on responsibility for something that the other should deal with, nor do they want to find themselves in a position where the IR35 status has been declared incorrectly, and HMRC needs to be involved.

In essence, if you fall into one of the following categories, then you may be affected by the rules:

  • A worker who is using an intermediary and provides a service
  • A client who receives the services of a worker who is using an intermediary to provide that service
  • An agency that provides the services of workers through an intermediary

When the rules apply, both employee National Insurance and Income Tax must be deducted from the fees and then paid to HMRC. Any apprenticeship levy and employer National Insurance should also be paid to HMRC, in this case by the person who is responsible for paying the worker’s intermediary.

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