What is IR35?
IR35 are HMRC rules that determine whether you should be classed as an employee of your clients and taxed accordingly.
These rules started in April 2000 and were upgraded for the public sector in April 2017, and extended to the private sector in April 2021. However, the original 2000 legislation is still in force for contractors who work for clients that are small companies, as defined by the Companies Act 2006.
If you are a genuine contractor, freelancer, interim or consultant who is not a disguised employee you should have nothing to fear from IR35. You do need to take the time to understand how the legislation works and apply best practice to ensure it does not apply to you, to ensure you have a robust defence if investigated by HMRC.
What do the recent IR35 changes mean?
IR35 changes means that your large client is now responsible for determining whether a contract is inside or outside of IR35. This differs from the original legislation which puts responsibility on you and your company. The legislation also allows HMRC to recover tax liabilities from the client, so as you can imagine this change in financial risk is causing a shift in how medium and large businesses use contractors.
I am a contractor operating through a personal service company (PSC), what does IR35 mean for me?
The end- client (most likely the company you are working for), must confirm the IR35 status of a contract by providing a ‘Status Determination Statement’ (SDS). The SDS must be provided in writing to you and if an agency is involved in the labour supply chain, a copy must be provided to the agency responsible for paying the PSC.
The contract is determined outside of IR35, what now?
If an assignment is outside IR35 then employment taxes are not required to be paid, your PSC should receive the payment gross from the end-client or agency, and your company will account for these in your Corporation Tax return – with any personal tax paid through your company payroll or your annual Self-Assessment as usual.
The contract is determined as inside IR35, how will this impact me?
Unfortunately, there is no blanket answer. It depends on a number of factors including whether or not you have contracts in both categories, different revenue streams in your company, potential for growth and much more. For many your client will make it mandatory that you are paid via a payroll and you may be left with little say in the matter.
How can I check the likelihood of the contract falling in or outside IR35?
HMRC have developed a tool CEST (Check Employment Status Tool) that will help determine whether a contact is inside or outside of IR35, though it is limited in its response and often doesn’t give a clear indication of your status.
However, we have also developed our own status tool and it explains how the legislation impacts you in more detail and scores values against your answers to show you how these key factors impact on your current position. You may then be able to take action to change your operational procedures to fall outside of this legislation.
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