Tax legislation: What is IR35 and who is responsible for it?

Although IR35 and off-payroll working restrictions can be perplexing, contractors and their clients must be aware of the processes and rules.

On April 6th, 2021, the UK's revised IR35 law went into effect. IR35, sometimes known as the off-payroll working laws, establishes the taxation of independent contractors. Its original goal was to prevent individuals (rather than businesses) from paying less income tax.

What is IR35?
IR35 is a tax law in the United Kingdom. It's intended to fix a tax loophole in which workers could set up a limited company structure in order to pay less tax. It is also referred to as off-payroll working rules. 

This tax law's principal goal is to tax "disguised" labour at the same rate as regular work. Workers are referred to as "disguised workers" in this context if they receive payments from a client through an intermediary, such as their own limited company, and their relationship with the client is such that if they were paid directly, they would be the client's employees.

Who does this apply to?
These rules may apply to you if you are: 

  • a worker who offers services through an intermediary;
  • a client who receives services from a worker via an intermediary;
  • an agency that delivers workers' services via an intermediary. 

Income Tax and employee National Insurance contributions must be taken from fees and paid toHM Revenue & Customs (HMRC) if the conditions apply. In addition, the person who pays the worker's intermediary must pay HMRC employer National Insurance contributions and, if applicable, the Apprenticeship Levy as well.

If a worker delivers their services to a client through an intermediary, the regulations apply; nevertheless, if they were hired directly, they would be classified as an employee. 

A contract for the purposes of the off-payroll working rules is an agreement between parties that is written, verbal, or inferred. 

Contract-by-contract, the off-payroll working rules apply. Some of a worker's contracts may come within the off-payroll working regulations, while others do not.

Who is responsible for my IR35 status?
Whether a worker is employed or self-employed, the tax status of the worker and customer, or the person paying the worker's intermediary, dictates the taxes the worker and client, or the person paying the worker's intermediary, must pay.

One of the most significant IR35 developments this year is that businesses will now determine an independent contractor's IR35 status. If someone is found to be in IR35, they will be taxed and make contributions in the same manner as an employee would. 

Contractors working with small businesses will continue to make their own decisions about their status.

For medium and large businesses, in particular, they will be in charge of determining the IR35 status of contractors they hire. A company is classified as medium to large if it meets two or more of the following criteria: 

  • revenue of more than £10.2 million every year;
  • total of more than £5.1 million on the balance sheet;
  • employs more than 50 workers.

Once the status has been determined, a Status Determination Status (SDS) will be issued to the individual the company contracts with.

If the status has been determined and the individual does not meet the criteria aforementioned, it is then the intermediary's job to determine if the contract is subject to IR35 regulations or not. 

HMRC have an online tool, the Check Employment Status for Tax (CEST) to assist your business in this matter. It is advised that you keep your evidence in order should you use CEST to determine the individual’s status as HMRC will validate the outcome as long as you have given the correct information. 

Dealing with potential disagreements:
Companies hiring independent contractors are now required by law to establish a status disagreement method through which individuals can contest their status determination. 

You will need to create a policy and notify your contractors about it. You will have 45 days to reply to a contractor's disagreement from the date you receive it.

The recent changes in tax legislation can be confusing for many but Persona Finance is here to answer any queries relating to IR35. We also aim to simplify your business needs by providing remote accounting services. For more information on how IR35 rules work or for other business and accounting queries, please contact Persona Finance at [].
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