This arrangement suits employers, as they do not have to pay national insurance contributions for these workers and it also suits the individuals themselves, who often set themselves up as limited companies or register as self-employed. This then means they pay national insurance and income tax at lower rates than they would if they were employed.
It is a piece of tax legislation that is aimed at identifying individuals who are avoiding paying the tax that they should be. The IR35 legislation specifically challenges those people who supply their services to clients via their own company whether that be a limited company or via someone who is legitimately self-employed – a true freelancer. It focuses on the relationship between the one who is paying and the person being paid. Being outside of IR35 is about proving that there isn’t an employment relationship NOT about proving self-employment, there is a difference. If HMRC do not recognise the contractor in question as ‘self-employed’ from a taxation perspective then they should be taxed the same way that a permanent employee should be, meaning they fall inside IR35.
The legislation is complicated and there is no definitive guide as to who falls within IR35, this means that individuals face a considerable amount of uncertainty and potentially facing an unexpected fine if the taxman challenges their status.
HMRC could technically challenge the status of any worker who is claiming to be outside the scope of IR35 and therefore entitled to operate as a limited company or sole trader rather than an employee. In practice, the large number of workers operating this way made this very difficult for HMRC to investigate everyone and so new rules came into force in April 2017. From April 2017 the responsibility for determining IR35 status was decided by the clients rather than the contractors themselves. This legislation changes only applied to the public sector however from April 2020 it will stretch to the private sector.
Basically, for medium and large sized businesses, the end clients will be responsible for determining the IR35 status of the contractor, and the agency or end client will be responsible for deducting the relevant tax and National Insurance, small businesses will be able to continue as they currently do.
If you are the agency or a hiring organisation, you must begin to start to understand your contractor workforce from an IR35 prospective to begin managing the process of the reform that comes into effect in 2020.
If you are a contractor, it is important to understand your rights and obligations under the new rules.
It hasn’t come as a shock that these laws are rolling out to the private sector as well as the public sector. It isn’t exactly a popular decision as since the very beginning, IR35 has been criticised for its complexity and for ignoring the difficulties when interpreting the boundaries between a genuinely self-employed contractor and an employee. It now seems even more unfair on contractors when they do not receive any employment rights despite the additional tax they have to pay.
Whether you are a contractor or those engaging with contractors it’s important to start understanding your obligations now.