The IR35 rules in the UK are designed to regulate freelancers or contractors who are effectively working as employees without being on payroll. These types of workers often carry out similar work to a full-time employee, but invoice their services as a sole trader or limited company, rather than being employed by the company. Although most of these contracts are genuine, the aim of the policy is to address potential tax avoidance, by ensuring any non-payroll workers are recognised as being functional employees and paying appropriate tax levels accordingly.
Whilst IR35 was first introduced in 2000, the policy was altered in 2017 for public sector contracts, with the onus being placed on the client – rather than contractor – to clarify the employment status of the worker. This change is now being brought in for medium and large private sector employers as well.
Originally the changes were intended to be brought in on 17th March 2020. However, due to the unforeseen circumstances surrounding the coronavirus pandemic, the implementation date was postponed until April 2021.
Old IR35 Rules
To comply with IR35, the working relationship between a contractor and their client must be categorised to determine whether or not they fall within IR35. If a self-employed contractor is deemed to fall outside of IR35 rules, they can invoice their payment through their own company. However, for those whose terms of contract mean they are deemed to be working as a “disguised employee”, income tax and National Insurance must be deducted from their earnings in an equivalent manner to an employee.
Falling within IR35 is a less attractive proposition for contractors. They are then required to pay tax and national insurance at the same rate as an employee, without the benefits of a true employment contract – such as holiday or sick pay.
How are the new IR35 Rules different?
The new reform in April 2021 brought private companies in line with the current rules for the public sector. Within the new rules, it is the responsibility of the client, to evidence the self-employed status of their contractors. They are charged with reviewing the status of all their contract workers, assessing if they fall within IR35 and ensuring that the appropriate tax and National Insurance is being paid. Small businesses, as defined in the new rules, are be exempt from this chain.
The client must present their decision to the individual through a Status Determination Statement (SDS), which the individual has 45 days to appeal against if they disagree. If there is an extended supply chain in which the end client is not also the fee payer, this SDS must be passed by them onto the fee payer.
What will this mean to employers and contractors?
This could make hiring contractors much riskier, since it is the client who is fined if it turns out they incorrectly identified the contractor as falling outside of IR35. Consequently there are fears that it discourages companies from taking on contractors. For contractors, they need to clarify with their client whether their contract falls within IR35 before entering into it.
Since the new rules require a lot of additional administration for many companies, there are no penalties issued by HRMC for errors during the first 12 months, unless there is evidence of deliberate non-compliance. HMRC is not be opening any inquiries into previous contracts, in cases where a client may report a different employment status than previously registered.
How to determine the employment status of the individual
It is important to have a clear understanding of the criteria of the IR35 rules, to be sure of whether they apply to your contract.
Some elements to consider are:
Obligation of work – Is the contract project based, with no obligation for continued provision of services or payment after completion of the project? Or does it requires continuing provision of work - akin to an employment contract? Does the contractor also carry out additional tasks for the client outside of the specified project?
Financial risk – Is it the contractor or the client who bears the financial risk of the work being undertaken?
Management and supervision – Does the contractor have control over their own working patterns and methods? If there are strict requirements on the way in which the work is carried out, this would fall within IR35 rules.
Exclusivity – Self-employed contractors are able to work for multiple clients as they choose. Any clause in the contract that demands exclusivity would come under IR35 rules.
Substitution – Does the contract specify that it must be the individual themselves who carries out the work, or does it allow for a substitute or sub-contractor to complete the work on their behalf?
Equipment - Does the contractor supply their own tools, equipment and PPE for the job, or is this supplied by the client, as it would be for an employee?
The contents of this article do not constitute legal advice and are provided for general information purposes only.
The Legal Stop provides fixed fee legal services and legal and business document templates for individuals and businesses. Our services include:
We aim to make the law and provision of legal services accessible and transparent to people and businesses alike!
Expertise: Legal Services
The Legal Stop is a straightforward online business using information technology for the public good. We aim to make the law and provision of legal services accessible and transparent to people and businesses alike!