This year saw big changes rolled out to IR35 legislation that had an impact on hundreds of thousands of contractors across the UK.
As a result of the changes that were implemented in April this year, many self-employed contractors will now have to pay more in tax and National Insurance. What’s more, many will have to endure lengthy, expensive and often stressful IR35 investigations.
To help contractors know where they stand when it comes to IR35, in this guide Umbrella Broker explain what IR35 is and how it will impact contractors in 2021.
What is IR35 & How does it impact contractors
Let’s start by looking at what IR35 is.
IR35 was first introduced in 2000 to prevent workers such as contractors from operating as ‘disguised employees.’ In other words, it was introduced as a way of targeting workers that claimed to be self-employed and therefore enjoyed tax benefits, but who actually operated more like employees.
When IR35 was initially introduced, it was the contractor’s responsibility to determine their own IR35 status.
However, this changed when HMRC deemed that too many companies were not IR35 compliant.
From here, in 2017, it became the client’s responsibility to determine the contractor’s IR35 within the public sector.
IR35 in the public sector
Since this point, in the public sector, it has been the responsibility of the client to determine the contractor’s IR35 status.
This has led to many public-sector clients incorrectly assessing contractors’ IR35 status, meaning thousands have paid more in PAYE tax and National Insurance contributions than needed.
Although these contractor have paid more in tax and National Insurance at the same levels as employees, they have not received the benefits an employee would, including statutory rights such as sick leave, holiday pay, maternity/paternity leave and a workplace pension.
IR35 in the private sector
Likewise, in April 2021, these changes were rolled out to the private sector too.
Now, it is the responsibility of private sector clients to determine the contractor’s IR35 status.
Just as with public sector contractors, this has badly impacted the 170,000 limited company contractors out there operating in the private sector, many of who will now end up paying more in tax and national Insurance contributions.
When does IR35 apply?
Clearly, no contractor wants to get caught out by IR35.
To help see whether you are in danger of getting caught out by IR35, there are certain tests and factors to look out for in your contract.
These include:
Control
Control is a big factor in determining whether you are a contractor or whether you are an employee.
When determining your IR35 status, the degree of control the client has over the contractor and how they complete their work will be closely looked at.
Within your contract, it should be outlined that the contractor has been hired to undertake a specific task and should only carry out the work in their contract.
Therefore, it is important that there is nothing in the contract to indicate that the client has control to move the contractor from task to task or be able to tell the contractor how to complete their work as this resembles an employee-employer relationship.
Working hours
Likewise, it’s important that there should be no specific working pattern outlined in the contract. Again, this indicates to HMRC that you work more like an employee than a contractor.
Mutuality of obligation
Mutuality of obligation is a situation where the employer is obliged to offer work and the worker is obliged to accept it, reflecting an employer-employee relationship.
Therefore, it’s important that the contract states that the contractor can refuse work, in order for it to remain outside IR35.
This means a contract should explicitly state that the contractor is free to take on other projects at the same time and that any contract that states exclusivity can be found to be inside IR35 and will raise a red flag to HMRC.
Substitution
The contract must allow for the contractor to send in a substitute to do the job for them if they can’t do it for any reason.
This is unlike employees who cannot send in a substitute to do their jobs for them if they are unable to do so.
How to avoid IR35 impact
Now you know what IR35 is you will inevitably want to know how to avoid getting caught out.
The great news is that there’s an easy way to do so – by going umbrella.
An umbrella company employs the contractor, meaning that they are automatically exempt from IR35. This means that umbrella contractors do not have the stress and hassle of getting caught out.
Not only does an umbrella company make the contractor exempt from IR35, they also offer a further range of benefits.
For example, by making the contractor an employee, an umbrella company offers contractors statutory rights. This includes sick pay, holiday leave, maternity and paternity leave as well as a workplace pension.
What’s more, the umbrella company will pay the contractor a salary, calculating and deducting what they owe in tax and National Insurance through the PAYE system. This means no difficult tax calculations for contractors.
Finally, the umbrella company takes care of business for the contractor, including admin, paperwork and invoicing.
In light of IR35 reforms, and knowing what other benefits an umbrella company can offer, if you have decided that an umbrella company is right for you, it’s time to find the perfect provider.
