As of 1 April 2021, the tax regulation known as IR35 will be rolled out in the private sector, a.k.a. Off-Payroll Working.
What is IR35? The IR refers to the Inland Revenue, as HMRC was known then. IR35 was a press release issued by the Inland Revenue in 1999, about tax avoidance, and it became law in 2020. Then it was about regulations in the public sector (The Public Sector is usually comprised of organizations that are owned and operated by the government and exist to provide services for its citizens).
Basically, it’s about a worker who would normally be considered an employee of a company, and therefore be subject to the % income tax and National Insurance taxes. In order to avoid paying those level of taxes, this worker might set him/herself up as a (limited) company (the “intermediary”) – thereby paying less taxes and taking out dividends – while doing the same work for an employer (client). This is considered tax avoidance.
If you are deemed to be guilty of tax avoidance per IR35, which is called to be deemed “Inside IR35”, then you need to pay all the relevant backdated income taxes and National Insurance and most likely a fine, but… you won’t have the same rights as an employee: no sick pay, no holiday pay, pension scheme, etc.. If you’re deemed to be “Outside IR35”, then none of this applies.
There is an online test to check your IR35 status (or anyone you hire) here: https://www.gov.uk/guidance/check-employment-status-for-tax.
In the public sector, it’s the client who’s responsible for checking the status of anyone they hire. In the private sector it’s mostly the limited company’s responsibility to determine whether a new contract is within or without IR35, although as of 1 April 2021, the responsibility is shifted to the client who pays the company/worker.
The main criteria to work out whether you’re inside or outside IR35 are:
- Does the client determine what you do, how you do it, where you do it, or do you?
- Do you have to do the work yourself, or can you provide a substitute?
- Is your client obliged to offer you work, and are you obliged to accept it?
- Do you carry financial risk, and are liable for any mistakes you make?
- Do you have/use your own equipment?
These criteria are looked at for each individual client you have. There are other criteria that might come into play, and looking at this, it seems quite complicated.
So, if you employ the services of the limited company, it’s up to you now to verify whether IR35 applies to this worker. Please proceed with caution. If you’re not sure, then ask for professional help! There are companies who specialize in this field, and could help you out.
If there’s anything I can do to help you regarding this new regulation (keeping in mind I’m by no means an expert), then please get in touch.
As always, keep it simple and… Flourish and Prosper 🙂
