Having just read that sentence, I suspect there are many freelancers, independent consultants and contractors whose blood just froze. IR35 rules are like the killer in a low budget horror film. Just when you thought they were finally gone, they jump out to scare the pants off you, again.
Well, sorry folks, it’s back. IR35 is due to release its latest sequel, and the reviews are unlikely to be good!
For those who don’t know, IR35 is a set of tax rules that apply to so-called ‘hidden workers’. Those employees who work off the payroll as contractors and pay their own tax, NI, and expenses usually to their financial advantage.
Often contractors set up ‘personal service companies’. These are limited companies having only one director who is also sole shareholder. They offer their services on a contract basis with no implied employment contract or associated responsibilities assigned to their clients.
It’s the very definition of ‘having one’s cake and eating it’ for both parties.
Headline – Taxman Not Happy
HMRC was far from happy with this state of affairs so introduced IR35 in April 2000. The rules are designed to prevent companies from using contractors under the same circumstances as employees .
Unfortunately for the taxman, the IR35 rules were easily avoided.
In April 2017 HMRC upped the ante. They now require public sector employers to prove their contract staff were not de facto employees who should be paying their tax and NI using PAYE.
HMRC published a set of tests to help client organisations make their decision. The criteria included:
- How much control the organisation has over the contractor.
- The nature of the work and the circumstances in which the work is done
- How unique the service is over other suitably qualified permanent staff.
- The financial risk associated with the contractor
- The degree of mutual obligation the contractor and client have in relation to the work.
There is also an online test for firms to assess these criteria called the CEST.
The employer must also provide a Status Determination Statement (SDS) that proves that contract staff do not breach the IR35 rules.
As for contractors, they need to prove a sufficient degree of separation from the client business. This means having dedicated business insurance, using defined, time-limited contracts and not being added to client IT systems, including email.
So, yes, it’s a bit of a minefield, and the impacts for both contractor and client can be significant if the rules are not applied with care.
So What’s Changing?
Now that the rules have been tested in the public sector, from April 2021, they will apply to large private sector firms.
There is good news for SME’s, however. IR35 won’t apply to businesses with less than 50 staff, a turnover not exceeding £10.2m or with a balance sheet of less than £5.2m.
Some larger SME’s, though, may find these figures may be easily breached perhaps within a single year of trading. So ongoing vigilance for IR35 will be essential. If your company is moving towards these kinds of figures and uses contract staff, be sure to do ongoing reviews to avoid issues.
As I said, it’s a minefield.
The Shape Of Things to Come?
There’s likely to be some more disruptive changes in the pipeline for the contractor market. As the chancellor hinted in the March 2020 Budget, he’s almost certainly exploring options to implement some degree of equalisation in the taxes paid by employees and contractors.
More on that after the Budget on March 3rd, I expect.
Need To Check Your IR35 Status?
If you’re not sure of your status re IR35 or need some advice on how to mitigate risks, we’re here to help. Call my team today on 0161 917 7864 or email me at firstname.lastname@example.org. IR35 may well be a horror show, but it’s one where there doesn’t have to be another sequel.