By Caitlyn Buchanan, 22.04.2021
On 6th April 2021, Her Majesty’s Revenue and Customs (HRMC) brought significant changes to the IR35 Tax Legislation into force. The legislation sets out clear rules for classifying a worker as an independent contractor instead of as an employee. IR35, also known as intermediaries’ legislation, was included as part of the Finance Act 2020. It aims to identify genuine contractors and discourage disguised employees for tax avoidance purposes.
The IR35 tax legislation was due to commence in April 2020, however, due to the pandemic, its implementation was delayed. With remote working becoming the norm for several UK-based businesses, many have made a shift to hiring independent contractors instead of hiring full-time employees. Now that the IR35 tax legislation has come into force more employers will need to evaluate their compliance especially when it comes to hiring remote teams.
What is IR35?
The IR35 tax legislation aims to provide a clear set of rules for businesses to follow when classifying the employment status of their workers. The responsibility has now been placed on employers to determine the employment status of contract workers; this is because PAYE and NIC will be deducted at the source of income. The employer (either an agency or the end client) will be responsible for deducting the relevant payments on the worker’s behalf before paying PSC fees.
What are the IR35 Rules?
An employer must determine if contracted work is inside or outside of IR35 depending on the agreement. If a contract is inside IR35, the contractor will be classified as an employee and therefore subject to the same tax and National Insurance Contributions (NIC) that normal employees pay. If a contract is outside IR35 the worker is classified as an off-payroll independent contractor.
Please note: For UK contractors IR35 conditions allow for sub-contracting; meaning work can be carried out for multiple clients at once. However, if an employment agreement stipulates that the independent contractor does not have the right to sub-contract or work for other clients, the independent contractor must be classified as an employee.
A self-employed independent contractor may work on a project basis without any obligation to keep working for that employer once the respective contract is fulfilled. Additionally, the employer is under no obligation to keep offering contracts after the existing project is completed.
Can IR35 contractors continue to work through a limited company?
Yes, an independent contractor can continue providing their services through a limited company even when a contract is deemed to be inside IR35. It is important to remember that IR35 status is based on each assignment, so, it is possible to be working on a range of assignments, some ‘inside IR35’ and some ‘outside IR35’ if the right processes are in place. UK contractors should seek professional advice to understand their obligations and rights under the IR35 reform.
For assignments that are deemed inside IR35 contractors will need to ensure the correct PAYE tax and National Insurance (NI) is paid, this can be done through their limited company. In the eyes of HMRC, the contractor will be considered an employee on these assignments.
However, if work is being carried out for a small end client or business, the responsibility for deciding the contractor’s employment status would fall on the end client, rather than the contractor’s limited company.
Who will be affected by IR35?
The IR35 reform will affect the employment of off-payroll consultants and subcontractors many of whom are working in construction and technology. As well as start-ups and small and medium-sized businesses that need to bring in people with technical skills for short to long-term projects.
What do Employers need to know?
Businesses in the UK that engage independent self-employed or limited company contractors are required to determine who has IR35 status and tax liabilities. Employers are responsible for deducting PAYE and NIC at the source of income for contractors who are inside IR35.
Consequences of Misclassifying IR35 Contractors
If a contract falls within IR35 rules, then the independent contractor is to be classified as an employee. This means the employer is accountable to pay the unsettled income tax along with National Insurance contributions.
HMRC can look back on previous independent contractor agreements to determine if the carried-out work falls within IR35 rules. If HMRC finds an arrangement to be classified within the scope of IR35 they may request additional income tax and National Insurance contributions to be paid along with interest and penalties. To avoid financial consequences, Business owners must be diligent in their classifications and are encouraged to seek professional advice each time a new arrangement is negotiated.
Information in this article is only general advice. We strongly recommend that you contact a local tax professional to help make IR35 classification decisions for each unique circumstance. Euro Company Formations can connect you with a local UK tax professional. Or if you are looking to operate a contractor business as either an international or UK limited company, we would be happy to assist with company formation and ongoing compliance obligations. Please do not hesitate to contact us today or call +353 (0) 16461627.Contact US