Back in 2019, the government announced the introduction of new legislation for all off-payroll workers (contractors) known as IR35. This new legislation was due to come into effect in April 2020, however due to the impacts of the Covid-19 pandemic, the changes were postponed to 2021 and are now in place.
We explain below what IR35 is, and what both contractors and employees need to know.
What are the IR35 rules?
IR35 is the name given to off-payroll tax legislation designed to stop tax avoidance by contractors supplying their services to clients via an intermediary. The intermediary will usually be the contractor’s own limited company but could also be a partnership, managed service company, or an individual.
The IR35 rules were introduced to make sure that any contractors providing their services directly to the end client and who would be classed as an employee if they were contracted directly, pay the same Income Tax and National Insurance contributions as other employees.
Who do the IR35 rules apply to?
The off-payroll working rules may apply to you if:
- You are a contractor providing services through an intermediary
- You are a client receiving services from a contractor through an intermediary
- You are an agency providing contractors’ services through an intermediary
If the rules apply, Income Tax and employee National Insurance contributions must be deducted from fees and paid directly to HMRC. The employer National Insurance contributions and Apprenticeship Levy (if applicable) must also be paid directly to HMRC.
Reasonable care should be taken when deciding the employment status of a contractor , and failure to do so will result in the worker’s tax and National Insurance contributions liability becoming your responsibility.
If you are unsure whether the rules apply, you can use the HMRC’s Check Employment Status for Tax service.
When do the IR35 rules apply?
These new rules apply if a contractor provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly.
The off-payroll working rules apply on a contract-by-contract basis, so there could be a situation where a contractor may have some contracts which fall within the off-payroll working rules and some which do not.
Until now it has been up to contractors to decide whether their working arrangements fit into IR35 or not, but from 6th April 2021 the new rules mean that all public sector authorities and medium and large-sized private sector clients will be responsible for deciding whether the rules apply.
Contractors should be given the reasons behind any decisions in what is known as a Status Determination Statement, and will have the right to dispute the decision if they do not agree with it.
If a contractor provides services to a small business in the private sector, the contractor’s intermediary will remain responsible for deciding whether the rules apply.
If you have any questions about off-payroll working rules or general accounting or bookkeeping queries, please get in touch with us here at Magpie Accountancy.