The IR35 reforms, officially known as the Intermediaries Legislation, will be rolled out to the private sector bringing it in line with its existing implementation in the public sector.
The IR35 reforms were initially due at the start of the 2020/21 tax year. However, the outbreak of coronavirus meant that implementation was delayed until the start of the 2021/22 tax year.
When the 2021/22 tax year kicks off on 6 April, HMRC will have expected all medium and large companies in the private sector to be fully prepared for one of the most important changes in UK tax laws for several decades; the increased rollout of the IR35 reforms.
But what does all this mean and how will it affect employers and contractors operating through their own personal service companies (PSC)?
In this article, we will run through the history of IR35, what the changes mean, why they’re being implemented and how companies can best prepare.
► What is IR35?
IR35 was introduced in 2000 to ensure that contractors operating through their own PSCs, and carrying out work that was similar to that of a regular employee, broadly paid the same amount of tax and National Insurance as a regular employee.
Due to non-compliance, reforms were made to the existing legislation in April 2017. The changes saw that public sector bodies were made responsible for determining whether or not a contractor was operating inside or outside of IR35. They also became responsible for reporting and deducting tax and National Insurance contributions (NICs) from those that fell inside IR35.
► What are the changes?
In reality, these aren’t really changes but rather an expansion of the rules already in place. Previously, the IR35 reforms only really affected the public sector; however, they're now being rolled out to include the private sector too.
A company will be affected if they meet two or more of the following criteria:
- have an annual turnover of more than £10.2 million;
- have a balance sheet total of more than £5.1 million;
- have more than 50 employees.
► Why the changes?
To try and tackle the problem of “disguised employees” or “deemed employment”, the Government has decided to expand the current regulations to include medium and large private businesses as defined in the Companies Act 2006. Small companies in the private sector will remain unaffected.
By working through an intermediary, contractors who produce work or provide services for clients (businesses) can end up paying less tax and NICs than those working as official employees.
Consequently, the goal of the IR35 legislation is to ensure that if a worker should be considered as an employee for tax purposes, then their tax and NICs remain consistent with that of a regular employee.
Businesses that look to employ the services of contractors can save themselves significant money by avoiding paying employer NICs equalling 13.8%, and the Apprenticeship Levy of 0.5%. They also do not have to offer any employment rights or benefits such as a workplace pension or annual leave.
► What do the changes mean and how to prepare?
Because the changes mean that companies now have to decide the IR35 status of the contractors they use, it would be wise for affected companies to review the current contracts and contractors they have in place. This means determining whether someone operates inside or outside of IR35.
To help decide this, HMRC has released a tool that will help determine whether or not someone should be classed as employed or self-employed for tax purposes—i.e. whether they fall inside or outside of IR35.
Once the test has been completed, a company will have to provide their determination, and the reasons behind it, to the worker and the organisation they're contracted to in a document called a Status Determination Statement (SDS). They should also keep detailed records of the determinations, including the reasons behind the decision.
The fee payer, i.e. the company paying the intermediary, is responsible for deducting the tax and NICs and paying and reporting these to HMRC.
Finally, a company ought to have approved processes in place should they ever have to deal with disagreements that occur resulting from the determination.