Also known as the “off-payroll working rules” or “Intermediaries Legislation”, IR35 was introduced in 2000 to combat tax avoidance.
When does IR35 apply?
IR35 can apply where a contractor or freelancer provides services through an “intermediary”, which is often a personal service company they set up (usually a limited company).
There are many genuine cases, of course, but sometimes intermediaries are set up to disguise employment and thereby reduce tax and National Insurance contributions (NICs) payable. Moreover, some unscrupulous employers also pay workers via intermediaries to get out of providing benefits and employment rights, such as holiday and sick pay, to people who are de facto employees.
As explained on government website GOV.UK: “The [IR35] rules make sure that workers, who would [be] an employee if they were providing their services directly to the client, pay broadly the same tax and NICs as employees.”
So, whether you’re a contractor, freelancer or a client who employs them, what else do you need to know about IR35?
Major IR35 changes are happening next year…
Since 2017, public-sector organisations using contractors and freelancers have been responsible for deciding their employment status. If contractors or freelancers worked for private-sector clients, the intermediary was responsible for deciding employment status for each contract.
However – from 6 April 2020 – all public-sector organsiations and medium-sized and large private-sector organizations using contractors or freelancers will be responsible for deciding whether IR35 rules apply.
“Private sector” includes third-sector organisations…
This includes many charities. So, if you’re a contractor or freelancer working for a medium-sized or large charity, IR35 changes could affect you and your client from 6 April 2020.
Some intermediaries will still decide employment status…
If a contractor or freelancer provides services to a small private-sector client (ie one with fewer than 50 employees and/or a turnover of less than £10.2m), the intermediary will still be responsible for determining employment status and whether IR35 rules apply.
IR35 could reduce your net income significantly…
If IR35 rules apply, tax and NICs must be deducted from fees and paid to HMRC. According to contractorcalculator.co.uk (“your expert guide to contracting”):
“IR35 can reduce the worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and NICs.”
As well as deciding a worker’s employment status for IR35 purposes for every contract agreed, clients (ie organisations using contractors or freelancers) must explain their decision to the worker or organisation/agency they contract with, and maintain detailed records of their decisions, why they made them and fees they’ve paid. Clients must have processes to deal with any IR35-related disputes that occur.
HMRC can carry out an IR35 enquiry…
To find out whether someone is genuinely a contractor or freelancer. According to GOV.UK:
“HMRC won’t just look at what’s written in the contract. They’ll look at the actual working relationship between you and the client. Each written contract will only be accepted as valid evidence if it accurately reflects the individual circumstances of the work engagement.”
Post enquiry, HMRC will give its opinion on whether IR35 applies. If a contractor, freelancer or clients disagrees, they can object. But if HMRC doesn’t agree with the objection, it will issue a decision, which can be formally appealed.
There are penalties and sanctions for IR35 non-compliance…
Those found within IR35 following an HMRC enquiry must pay income tax and NICs due, as well as any interest due. Those who “didn’t exercise reasonable care in completing [their] tax and NICs returns” may also have to pay a penalty. Reasonable care must be taken when a client makes decisions about a worker’s employment status for IR35 purposes, otherwise the client can become liable for any tax and NICs payable.
HMRC has published guidance to the 2020 IR35 changes…
Those who work with contractors and freelancers can visit gov.uk to read basic tips on how to prepare. HMRC has created an online tool to enable employers and workers to check employment status for tax.
IR35 changes – cause for concern?
If the thought of the IR35 changes that will be introduced in April 2020 leave you feeling slightly worried, contractcalculator.co.uk offers some comfort. It states:
“If you are a genuine contractor, freelancer, interim or consultant who is in business on your own account, you should have nothing to fear from IR35. This is so long as you take the time to understand how the legislation works and apply best practice to ensure it does not apply to you, and have a defence prepared if investigated by HMRC.”