In this HR guide I discuss IR35 and, in particular, the changes which came into effect in April 2021.
What is IR35?
IR35 legislation is designed to tax disguised employment. This is where an individual receives payments from a client via a limited company and the relationship is such that had the person been paid directly they would be an employee of the client.
Contractors operating through a limited company generally pay lower income tax, do not have to pay national insurance contributions and can claim certain expenses.
The IR35 legislation clamps down on contractors operating through the guise of a limited company when in reality they are effectively employees.
What are the changes?
From April 2021 instead of individuals in the private sector assessing whether they come within IR35 businesses will be responsible for determining whether their contractors fall within IR35.
Since April 2017 firms in the public sector have been responsible for IR35 compliance but from April 2021 private firms will be responsible too.
Firms that meet at least two of the following criteria will not be affected by the changes:
- Turnover is no more than £10.2 million per year;
- The balance sheet total is no more than £5.1 million; and
- No more than 50 employees.
In its guidance HMRC lists a number of factors to be taken into account but stresses that there could be other factors too and it is important to look at the overall picture.
The factors mentioned by HMRC include:
- Personal service;
- Financial risk;
- Basis of payment;
- Mutuality of obligation;
- Holiday pay, sick pay and pension rights;
- Part and parcel of the organisation;
- Rights to terminate the contract;
- Opportunity to profit from sound management;
- Personal factors;
- Length of engagement; and
- The intention of the parties
There is also an online tool to assist with determining whether HMRC will treat a contractor as an employee or self-employed for tax purposes.
With many contractors not being able to work through their limited companies there is likely to be an increase in the use of umbrella companies.
A common set up is that the contractor will be employed by the umbrella company and the umbrella company will pay their earnings through payroll. The contractor should have the right to statutory benefits such as statutory holiday pay, statutory sick pay and maternity/paternity pay while at the same time having the flexibility of being able to work for various end clients.
This guide is intended for guidance only and should not be relied upon for specific advice.
Do check mattgingell.com regularly for updated information.