IR35 legislation was first introduced back in 2000 and was designed to tackle tax avoidance by those who created artificial limited companies to pose as a contractor as opposed to an employee for a business. Since 2000 the legislation has undergone several amendments with one of the most recent being implemented in 2017 that applied to those working in the public sector only and placed the responsibility of determining the worker’s status on the hiring company. This rule is now being applied to the private sector and will come into force 6 April 2020.
For more information on the rules and how to start collecting evidence to support your work status please do read our full article on IR35.
This means that the new change not only affects contractors and freelancers, but also employers and companies who use them. The company hiring external workers will become responsible for determining whether or not NIC and income tax should be deducted from the contractor’s pay. Similarly, if you are a recruitment agent who places contractors, you will become responsible for declaring the contractor’s status if you handle their pay.
Small businesses will be exempt from the new rule (however our advice is that you should still make yourself aware of the rules should the government extend the legislation in the future to all sized businesses). A ‘small business’ is defined by the Companies Act 2006 and states that you should meet two or more of the following criteria in order to qualify:
- A maximum of 50 employees
- Annual turnover under £10.2 million
- Balance sheet which is no more than £5.1 million
If you are a contractor that is hired by a qualifying small business then be aware that the responsibility falls on you to prove your status as a legitimate off-payroll worker (non-employee) and are not required to have NI and income tax deducted from your pay.
New processes for IR35 for private sectors
To implement these new rules there are two processes which have been introduced:
- The hiring company (sometimes also referred to as ‘end-client’) will be required to confirm the IR35 status of the worker and provide a ‘status determination statement’ which includes a declaration of status and provides adequate reasons for reaching this conclusion. Until this is done, the end-client remains responsible for collecting NIC and income tax.
- If you are a contractor and do not agree with the decision made by the hiring company then you are able to request a review. The end-client must complete this within 45 days and respond to you with their reasoning behind the decision.
What to do next
- If you are a business that uses contractors then familiarise yourself with the rules to understand how you can determine if a worker should be on your payroll as an employee or off-payroll as a legitimate contractor. This will be important for when you are issuing the ‘status determination statement’ and to resolve any disagreements if they occur.
- Whether you are the end-client or the contractor, you may want to consider taking out tax investigation fee protection. IR35 remains a highly-contentious area with HMRC and is often picked up for review so taking up fee protection may be a prudent option.
As mentioned, these changes are due to come into force in April 2020. Be sure to understand the rules and make preparations as to how to implement checks if you are an end-client company.