IR35 April 2021

Changes to the off-payroll tax legislation, IR35, which was due to be implemented in April 2020, will now come into place on 6th April 2021.

IR35 is the terminology associated with the concept of separating a person’s status for tax purposes from a person’s status for the purposes of employment protection rights.

IR35 is designed to assess whether a contractor or self-employed consultant is genuine as opposed to being a “disguised” employee for the purposes of paying tax.

HMRC has introduced this legislation to tackle the benefits of tax efficiency that can be gained by working as a contractor/self-employed consultant as opposed to being an employee.

This means that companies should identify any self-employed consultants in their workforce who offer their services through a limited company (personal service company), and review how they are going to manage their tax from the above date based on whether they fall “inside” or “outside” of IR35.

The government has an online tool that can be used to ascertain if there will be an obligation on the company to deduct income tax and national insurance contributions at source when paying the contractor.

https://www.gov.uk/guidance/check-employment-status-for-tax

In general, to identify if the contract is “inside” or “outside” of IR35 you should consider the following:

  • Supervision, Direction, Control – how much say do you have over the work of your contractor/self-employed consultant e.g., times required to work.
  • Substitution – can another contractor/self-employed consultant carry out the work in place of another and it have no effect on the job.
  • Mutuality of Obligation (MOO) – is there an obligation for work to be offered and for it be accepted.

The above is a starting point only and there will be other factors to consider which may affect the IR35 determination reached, for example details about equipment use, payment methods, and integration in the company can all influence the outcome.

Companies should also review their consultant/contractor terms of agreement to ensure that it is clear whether they fall inside or outside IR35.

In the private sector the new rules will only apply to medium and large businesses.  A small business will be defined by the Companies Act 2006, this is broadly a business that has two or more of the following features:

  • a turnover of £10.2m or less;
  • a balance sheet total of £5.1m or less; and/or
  • 50 employees or less.

The impact of these changes should not be underestimated, and sufficient preparation will be crucial.

As a result of Covid-19 many businesses are re-assessing their resource requirements which may mean more demand for off-payroll workers because of their flexibility.

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