What Is IR35 & The New Off-Payroll Tax?
IR35 is a term used to describe a set of tax regulations that are designed to tackle tax avoidance by workers and their employers. It relates to companies hiring freelance workers or contractors who charge the company in question for services supplied through an intermediary, usually a limited company or an agency.
The IR35 determines whether these contractors are in fact employees who essentially ‘work’ for the company or if they are providing their services illegally by avoiding tax such as income tax and national insurance contributions. These workers are called ‘deemed employees’, who the IR35 is designed to expose due to avoidance of tax payments by going through a limited company.
IR35 gained its name from the original press released published by the then Inland Revenue (now HMRC) announcing its creation. It came into effect in April 2000 and has since then been heavily criticised across the board because of its poor implementation, unnecessary costs and the fact it can be easily dodged.
On April 1st 2021, the new Off-Payroll Tax scheme will be enforced to medium and large-sized private sector clients, as well as the public sector which has already followed these rules since April 2017. This piece of legislation is also confusingly referred to as IR35, yet instead of the previous IR35 regulations, companies will now be required assess a contractor’s status of employment. As well as this, companies will also be required to pay employment taxes on top of fees paid to the contractor.
The Off-Payroll working rules applies to all public sector clients and private sector companies that meet 2 or more of the following 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.
Who Does IR35 & The New Off-Payroll Tax Affect?
The new IR35 regulations affect both contractors and freelancers as well as companies. If you are a contractor, freelancer, consultant or interim who is in ‘business on your own account’ (a limited company that also uses an intermediatory to provide a service) then you have nothing to worry about at all. If, on the other hand, you are a freelancer who is employed by the company to essentially ‘work’ for that company on a freelance basis, then the Off-Payroll Tax scheme will apply.
Companies will therefore have to determine whether a client is in fact a ‘worker’ or if they provide a service on an intermittent or irregular basis and therefore aren’t under employment.
The IR35 regulations will also affect agencies who provide freelance or contractor workers to a specific client, requiring them to owe large sums of money to HMRC due to the way freelancers and contractors will be taxed.
Why Are The Government Bringing In The New Off-Payroll Tax As Legislation?
By enforcing the Off-Payroll Tax scheme, the government are by their own admission declaring previous IR35 regulations as unenforceable. The act of ‘deemed employment’ or ‘disguised employment’ accrues to millions of pounds of avoided taxes, including the 13.8% of National Insurance contributions or the Apprenticeship Levy of 0.5% which companies have to account for.
Deemed employment also allows companies and employers to avoid providing employment rights or benefits, such as statutory sick pay or holiday pay, to workers. Many businesses hire workers through a personal services company or limited company, thereby opening the door for mismanagement of taxes and basic worker’s rights.
The new IR35 and Off-Payroll Tax regulations will help cover workers from being poorly treated, whilst also bringing in an extra millions of pounds revenue for HMRC, which is essential during the economic crisis due to the pandemic.
How To Comply With IR35 Regulations?
As stated, if you’re a genuine freelancer or contractor who is set up as a limited company and for multiple businesses then you’re fine. Due to being set up as a limited company however, you will be subject to Corporation Tax which HMRC state you must do specific things to work out, pay and report your tax including:
- Register for Corporation Tax when you start doing business or restart a dormant business. Unincorporated associations must write to HMRC.
- Keep accounting records and prepare a Company Tax Return to work out how much Corporation Tax to pay.
- Pay Corporation Tax or report if you have nothing to pay by your deadline – this is usually 9 months and 1 day after the end of your ‘accounting period’.
- File your Company Tax Return by your deadline – this is usually 12 months after the end of your accounting period.
Taxable profits for Corporation Tax include the money your company or association makes from:
- Doing business (‘trading profits’)
- Selling assets for more than they cost (‘chargeable gains’)
Can IR35 Regulations Be Avoided?
The short answer to this is no. There is no way to avoid the IR35 regulations legally. Many companies who employ numerous freelancers have already taken the decision to place all of their contractor and freelance staff on fixed term employment contracts. This, whilst protecting employment rights and jobs in general, also provides a hefty sum for employers to cover in tax costs.
Companies however that hire self-employed (sole traders) are not affected by IR35 regulations. This of course is a risky move and doesn’t alleviate the risk of a HMRC investigation which could cost businesses large sums of time and money. From 6 April 2021 companies must tell the worker and the agency, or other organisation that are contract, the determination of employment status. This is to be done whether the determination shows that the Off-Payroll working rules apply or not. Reasons must be also provided for the determination.
If you are a company or an individual who is still unsure how to determine whether a worker is employed or self-employed for tax purposes, then the Check Employment Status For Tax government resource tool should help resolve this.
We hope this has outlined to you exactly what IR35 and the new Off-Payroll Tax scheme is and whether you will be affected. If you require any more information on IR35 regulations or anything accounting related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.