From 6 April new IR35 rules will come into force. If you are self-employed or an employer that hires contractors or consultants, it is important that you are aware of these changes.
This blog will outline what IR35 is, what the changes are, why they are being made and what you need to do to be IR35 compliant.
What is IR35?
IR35 is tax legislation aimed at tackling tax avoidance by workers and businesses. Working as a contractor can be more tax-efficient for a worker and also means an employer does not have to pay National Insurance Contributions or provide employee benefits to the contractor. The IR35 rules assess whether a contractor actually is genuinely self-employed and not just an employee in disguise.
IR35 applies when a contractor or consultant provides their services through an intermediary, but would be classed as an employee if they contracted directly with the client. An intermediary is a party that makes arrangements for or pays individuals to work for a third party. However, even if the contractor is contracting directly with the client and there is no intermediary involved, the client still needs to determine the contractor’s employment status. This is because the client may be held liable to HMRC for misclassification if the contractor is deemed to be an employee.
If your contract is deemed to be inside IR35, this suggests an employment relationship. If your contract is deemed to be outside IR35, this suggests self-employment and a client/contractor relationship.
Find out more about what you should be aware of when engaging a consultant.
What are the IR35 changes?
At the moment, IR35 applies to public sector authorities such as government departments, schools, universities and local authorities. From 6 April this will change and IR35 will also be applicable to the private sector. This means that:
- medium and large sized businesses have to decide the employment status of contractors and consultants
- small sized businesses are still exempt from changes and do not have the responsibility to determine employment status – this remains the responsibility of the intermediary
- when a contractor’s employment status has been determined, the contractor should be given a Status Determination Statement (SDS) outlining the decision and the reasons for coming to the decision
More information can be found about IR35 and changes in our IR35 guide.
What conditions do clients need to meet for changes to apply to them?
All public and private sector clients must meet two or more of these conditions:
- annual turnover of over £10.2 million
- balance sheet total of over than £5.1 million
- over 50 employees
Please note that if the client has an annual turnover of more than £10.2 million but is not a company, unregistered company, LLP or overseas company, the rules will still apply.
What is a Status Determination Statement?
An SDS is a document stating the contractor’s position, which will be either that of an employee or someone who is self-employed. The SDS should be issued by the person engaging the worker (in other words, the client), and must be passed to the worker and the party the client contracts with (eg the intermediary).
If you are a client and need to make a status determination you can use HMRC’s CEST tool which will help you identify if a worker is self-employed or classed as an employee. You can also seek assistance from an independent advisor to help you make a status determination.
Find out the different factors you should take into consideration when making an IR35 status determination.
If you have any questions about IR35 and engaging consultants you can Ask a lawyer.