If you run your own business, are self-employed or are self-employed, chances are you've heard of IR35. It is a law that allows HMRC to collect additional payments when a contractor is an employee in any name. The legislation has been in place since 2000, but is subject to constant change. The latest change would be implemented in the private sector, as announced in the spring budget. However, this has been postponed to April 2021 due to COVID-19.
What is it?
The definition of IR35 is "excluding payment that works through an intermediary". It came into force in 2000, to prevent workers from disguising themselves as businessmen to pay less taxes. If a service provided by a contractor resembles a full-time job, the contractor falls under IR35 and is therefore taxed as a full-time employee.
Who does it apply to?
You can take three tests to find out if IR35 applies to you or your workers. These are: Control – does the client have control over when and where the contractor performs the work? Substitution: Does the contractor have to do the work himself or can he send a replacement? Mandatory mutuality: is the client obligated to offer work and the contractor obligated to accept it? If the contractor does not have these liberties, they fall under IR35 and are a "considerate employee."
What does this mean for the private sector?
As it stands on April 6, 2021, the way the rules are applied will change. This means that medium and large private sector companies will now have the responsibility to determine whether contractors they hire must pay taxes in the same way as permanent employees (within IR35) or unpaid workers (outside IR35). Previously, it depended on the entrepreneurs themselves.
How do I prepare for these changes?
If you are an entrepreneur, it is important to be proactive and assess whether you are in or out of IR35. Find out how you will be affected and what you can do next. If you think you might get into the next steps in legislation, be sure to correct any non-compliant behavior and demonstrate it to your customers. If you are an employer, do an audit of your current contractors to see where they are. Once your position is established, be sure to communicate openly with them to reassure them and avoid confusion. Being clear and transparent will ensure that all parties are on the same page.
Why is it controversial?
The IR35 was not without its sticking points. Employers fear that this new legislation will encourage their employers to unfairly lump them into IR35, which could reduce their wages. Meanwhile, some employers are concerned about the added administrative burden of IR35 and are not sufficiently prepared for these new changes. The government has also come under fire, with experts saying the new reforms will lead to a decline in the number of contractors. This could have an impact on the economy as UK companies struggle to find the talent they need.
What does postponement mean?
Some companies have welcomed the delay as it means they will have more time to learn and prepare their workforce for the new IR35 changes. However, this delay means that there is likely to be no 12-month soft landing period. Previously, this would have meant that no sanctions would be imposed on companies for the first year, except in cases of willful non-compliance. Now that means companies have a year to get it right, otherwise they risk fines. Donna Torres is Director of SMEs and Business Operations at Xero