Part 1. What is IR35?
The Intermediaries Legislation, or IR35, was released and executed by HMRC. When does IR35 come into effect? It was originally introduced in the UK in April 2000. It is an anti-avoidance tax rule designed to tax workers that fall within IR35 at a rate same as that of employment.
There were a few amendments made to the rule which were going to come into effect in April 2020. However, due to the coronavirus pandemic, IR35 postponement happened by one year i.e., April 2021. IR35 is also called the ‘off-payroll rules’ wherein the UK government target tax avoidance by workers who operate through a limited firm.
According to the IR35 2021 rule, if a limited company contractor work in a similar way as that of a permanent employee of the end client, then they are liable to pay the same or similar taxes on the total earnings earned as permanent employees. If the role performed by a contractor is found to be within IR35 regulation, then he will be considered an employee for tax-related objectives.
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To know more about IR35 reforms, visit the official UK government website https://www.gov.uk/guidance/understanding-off-payroll-working-ir35. Concerned businesses can also check their IR35 status using the online tool provided on this government website.
Part 2. How is IR35 changing?
IR35 reforms were introduced in the public sector in 2017. After its introduction, there are a few changes to IR35 legislation for the private sector introduced until April 2021. It was made with the intention to ensure that individuals who work as employees but operate through an intermediary will broadly the same amount of tax and national insurance contributions as an employee.
However, there were a few concerns raised by people that required review of the legislation. One of these concerns was how the IR35 will apply for “Overseas Clients”. The Government will modify the legislation to eliminate overseas companies with no UK presence from considering the off-payroll working rules.
The existing IR35 rule for arrangements outside the public sector will keep applying to arrangements where the client is completely overseas, and the limited firm will continue determining the status of the individual.
The reform will hold the private sector end-user of the worker’s services responsible to evaluate whether or not IR35 applies for all payments by large and medium businesses from 6 April 2020.
The new rules will apply to large and medium-sized businesses that operate in the private sector. These are the end-user of the fee payer and worker’s services in the recruitment sector.
The off-payroll regulation applies when the worker offers services to a client via an intermediary “Personal Service Company”. It would be categorized as an employee when they got contracted straight away with the client.
Before April 06, 2021, it is the responsibility of the limited company to decide its employment status per assignment. From April 2021, clients will be responsible for the determination of whether or not the Off-Payroll Working Rules or “inside IR35”.
Part 3. Overview of the new process
IR35 delayed HMRC will now be effective from April 2021. The new process will require considering a few factors to determine whether or not the assignment falls within or outside IR35.
As per the new IR35 legislation, key criteria have to be reviewed to determine the employment status of a worker. The route for determination of the employment status is dependent on facts. In a few cases, there isn’t a clear conclusion.
If the contractor has similar responsibilities, working conditions, and control as that of an employee of the same company would have, then they would be classified as “inside IR35”. This implies that the Off-Payroll Working Rules will be applicable in this case.
Part 4. The cost impact of the IR35 reform
All those contractors who fall under the IR35 rule have to be categorized and taxed in the same manner as that of permanent employees of the end client.
They will then be similarly subjected to PAYE as permanent employees. Under the PAYE situation, the worker will be entitled to pay towards employee National Insurance Contributions and income tax. Both these payments will be greater than the effective rate of tax mentioned under the PSC structure.
Small businesses can find it very expensive in terms of financial and administrative costs to keep on contractors with IR35 rules. There are higher possibilities that contractors may ask for a significant pay hike to keep the “take-home amount” the same as before paying extra taxes.
Part 5. Processes and documentation for IR35
If the contractor has unfettered and genuine rights to provide a replacement to complete a specific assignment of the contractor, then he falls “outside IR35”.
If the written contract, as well as working practices, displays that the client has nil impact on the way the contractor executes his/her services, then he is considered outside IR35.
- If the contractor doesn’t need to be supervised by the employer
- If the contractor isn’t paid “staff” benefits such as sick pay or holiday or
- If the employer doesn’t exercise control on the start time, end time, and break times,
Then in the above conditions, they will be treated outside IR35.
If the contractor can work on various other projects from other clients, along with the existing project of the clients, then they will fall “outside IR35”
Part 6. How will the IR35 reforms be implemented in April 2021?
IR35 will apply to the private sector from April 2021. Private sector organizations need to follow the below things to ensure they adhere to the rule.
- Companies will develop in-house expertise or improve external expertise to thoroughly understand the IR35 legislation.
- A company-wide audit needs to be implemented to find how and where contingent workers will be employed. They will also perform an extensive worker classification audit that aligns with the IR35 legislation.
- Evaluate the constitution of workers to determine how IR35 is going to impact the supply of contingent workers, plan the sourcing strategy for permanent and temporary employees and ensure incessant operations.
- Build SoW category expertise and procurement capabilities that would be can be beneficial for enterprises as well as contingent workers.