We have created a guide on IR35 and the latest developments to the anti-avoidance tax legislation. With expected changes in April 2021 it is crucial that businesses and individuals are aware of their obligations
The purpose of IR35 is to ensure that service providers pay similar tax and National Insurance contributions as if they were employees.
IR35 rules may apply where an individual provides services via an intermediary (most commonly a limited company) to a client (end user) and that individual (contractor) would otherwise be an employee of the client if the intermediary was not used. The intermediary may also be a partnership, personal service company or an individual.
What is an IR35 review?
At KLG we provide HR support for businesses in a variety of situations. One of our speciality areas is assisting businesses and individuals with IR35 reviews to ensure they are compliant with the latest rules.
The purpose of an IR35 review is to determine the individuals employment status i.e. are they a self-employed contractor or an employee. Our team of employment lawyers consider the wording of the contracts in place and the actual working arrangements to determine the reality of the relationship.
Some factors to consider include:
- Substitution: Can a substitute complete the work?
- Control: Can the individual choose their working hours or days off?
- Mutuality of obligation: Is the business obliged to provide the individual with work (and is the individual obliged to accept?)?
- Does the individual receive employment benefits?
- Who supplies the equipment?
Once the IR35 review is complete, the business and the individual will have a better understanding of what contractual terms and working practices are needed to ensure IR35 compliance.
An IR35 review is also a great way to show HMRC that you have taken all necessary steps and precautions when determining whether the relationship falls within the scope of IR35.
What do the IR35 changes mean?
The IR35 changes expected to come into force in April 2020 have been delayed for a year due to COVID-19.
The new IR35 rules mean that ‘private sector’ businesses are now responsible for determining the IR35 status of individuals. Therefore, the business (i.e. the client) will be liable to HMRC if an individual has the incorrect employment status. Previously the burden fell on the individual to prove their IR35 compliance.
‘Small’ private businesses are excluded from the changes.
Is it better to be inside or outside IR35?
If an individual is deemed to be caught inside IR35 (i.e. they are a ‘disguised’ employee, not a contractor), it is less beneficial from a tax perspective for the individual as all of their earnings will be subject to tax and NICs. However, they may be entitled to beneficial employee benefits (e.g. sick pay, maternity rights, etc).
If an individual is deemed to be caught outside IR35 (i.e. they are a contractor) they can pay themselves through the intermediary in a more tax efficient way. For example, by taking a smaller salary and larger dividends.
It is important that all businesses impacted by the new rules are aware of their IR35 obligations before the changes come into force.
If you are a business in need of HR support and assistance with an IR35 Review contact our team today on 0330 221 0684 or firstname.lastname@example.org.
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