What is IR35?
Known as Intermediaries Legislation, IR35 was created by HMRC to stop ‘disguised employees’ (contractors working through an intermediary such as a limited company) from avoiding tax by operating as contractors whilst working like any regular employee. It is up to hirers to determine whether a contractor operates ‘inside’ IR35 or ‘outside’ IR35.
Where does IR35 apply?
There is NO CHANGE for contractors registered as self-employed or sole traders.
However, if they work for an intermediary such as a limited company, the intermediary they work for will become responsible for determining their employment status for tax purposes.
If you are hiring contractors for your business, your obligations differ based on whether or not you are a large or a small company, as outlined by HMRC. Scroll down to find out more about these criteria and your responsibilities.
IR35 for large companies
You are considered a large company if you satisfy two of these three conditions:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million
- you have more than 50 employees
If you are also the fee-payer (i.e. not the intermediary/limited company) and the off-payroll working rules apply, you will need to deduct and pay tax on behalf of your contractors.
This means you will need to decide the employment status of every worker, even if they are working through a limited company or a recruitment agency. Communicate your decision through a Status Determination Statement (SDS) to the worker (contractor) and any agency/limited company.
You will also need to:
- Keep detailed records of employee status determinations.
- Have procedures to deal with disagreements over determinations
- Be able to confirm the size of your company if asked.
- Have procedures to deal with National Insurance contributions to HMRC.
There is also a Check Employment Status for Tax tool on the government website to help you decide if the off-payroll working rules apply.
IR35 for small companies
If you don’t satisfy two of the conditions above, then you will be classed as a small company.
Small companies will not have to decide the employment status of their workers.
Small companies are exempt from these changes, and responsibility and liability for IR35 are with the contractor.
However, you must be able to confirm and prove your company’s size.
What is outside IR35?
Here’s an excerpt from Brookson Legal’s website on what it means to be outside of IR35:
“To be outside IR35, you have to determine that the contractors being engaged are working truly independently and are not working in a manner akin to a permanent employee. In practice, to be outside IR35 means that the roles in which the contractors have been engaged are not subject to supervision, direction and control. There are no ongoing obligations to offer or accept work, and there is no requirement for personal service (i.e. a substitute would be acceptable). As such, the contractor can be engaged as an independent contractor via their limited company and would be paid gross for any works completed.”
For more info on IR35, see these links:
- https://www.gov.uk/government/publications/rules-for-off-payroll-working-from-april-2020/rules-for-off-payroll-working-from-april-2020
- https://www.which.co.uk/news/2021/03/ir35-tax-change-for-the-private-sector-begins-on-6-april-2021-will-you-be-affected/
- https://www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-intermediaries#off-payroll-working-rules
