What is off-payroll working (IR35) and does it apply to my business?

Frequently Asked Business Question:

I run a construction company and I am concerned about the new off-payroll working rules that are due to come into law on 6^th April. Can you explain these to me and what I need to be doing now to prepare for these changes?

Top Tip:

Off-payroll working or (IR35) is the term given to a set of tax avoidance rules that crackdown on disguised employment. If your work falls within its scope, you’ll be treated as an employee for tax purposes, even though you’re self-employed.

IR35 takes its name from the Inland Revenue Press Release 35, the press release that announced the impending arrival of the Intermediaries Legislation over 20 years ago. At the time, a growing number of contractors had started working through their own limited liability companies because it was more tax-efficient. But the government believed many contractors weren’t genuinely self-employed, but simply hid behind a corporate structure to pay less tax.

Contractors who work through their limited company enjoy a level of tax efficiency. While they don’t usually get employee benefits (like holiday and sick pay), they have flexibility and control over their work.

The benefit for employers hiring workers in this way is that they don’t have to pay employers’ National Insurance contributions or give contractors employee benefits. IR35 assesses whether contractors are for all intents and purposes employees when they take on work for clients.

If you’re a contractor who’s inside IR35,’ HMRC sees you as an employee and you face an income tax and National Insurance burden, just as employees do. You don’t face this if you’re ‘outside IR35.’

Many find the legislation complicated to understand. Even HMRC seems to struggle – its record on successfully fighting IR35 cases at tribunal is patchy.

This lack of clarity, along with ambiguity over employment status guidelines (including the available employment rights if contractors are found inside IR35), has proven controversial since the law’s introduction.

IR35 is also known as the ‘intermediaries legislation’ because it applies to workers who provide their services through an intermediary, rather than working as an employee. The intermediary will often be the contractor’s own limited company or personal service company. A personal service company is a limited company where the sole director, the contractor, owns most or all of the shares. The contractor then delivers services to clients. A contractor can provide their services directly to clients through their intermediary, or they might work with an agency.

The upcoming IR35 changes (from the 6^th April 2021) means that:

• medium-sized and large businesses will be responsible for working out the contractor’s employment status, not the contractor;
• contractors should be given the reasons behind the decision, and can dispute the decision if they disagree with it;
• small businesses are exempt from the changes – so if the contractor works for a small client, the contractor will still be responsible for working out their employment status.

End clients are classed as small businesses if they meet two of the following criteria:

• annual turnover of no more than £10.2 million;
• balance sheet total of no more than £5.1 million;
• no more than 50 employees.

If you’re a contractor working out whether IR35 applies to a contract, there are a few principles to consider. In general, IR35 won’t apply if the contract is for services rather than employment. To untangle that, you should see whether the contract specifically mentions these principles:

• supervision, direction, control;
• substitution;
• mutuality of obligation;
• the nature of the client relationship.