Widely anticipated changes to IR35 legislation in the private sector are set to come into play from April 6th 2021. Although reforms were initially planned to come into force in April 2020, these were postponed due to the coronavirus pandemic.
As the date draws ever closer, thousands of contractors are questioning what this will mean for them and whether it’s time to reconsider the way they operate.
To help contractors, Umbrella Broker has put together this handy guide on everything you should know about upcoming changes to IR35, from what they entail to what this will mean for contractors
What is IR35?
As a contractor, it is likely that you will have heard of IR35, but let’s start by looking at exactly what it is.
IR35 is a piece of legislation that targets so-called ‘disguised employees.’ These are workers such as contractors that call themselves contractors but operate more as employees, allowing them access to the tax-advantages enjoyed by the self-employed.
IR35 legislation initially came into law in 2000 and it was the responsibility of the contractor themselves to establish their own IR35 status. However, this changed when HMRC deemed that too many companies were not compliant.
In 2017, reforms to IR35 meant that in the public sector, it became the responsibility of the client to determine the contractor’s IR35 status.
IR35 in the public sector
When this change set into motion in 2017, thousands of public sector contractors were deemed to be inside of IR35, regardless of their actual circumstances.
For these contractors, this meant it became the responsibility of the client to deduct their tax and National Insurance contributions from the contractor fee before it was paid to them.
The problem was that public-sector clients were not always accurate in their assessments of the contractor’s IR35 status. This meant thousands of contractors were paying more in PAYE tax and National Insurance Contributions than they needed to.
Obviously, this had a direct and damaging impact on the contractor’s take-home pay.
As of April 6th 2021, these rules will also be rolled out to the private sector.
IR35 in the private sector
From 6th April, it will similarly become the responsibility of the client in the private sector to establish the contractor’s IR35 status. This is true in all cases unless your end client is a small business. To find out more about what constitutes a small business, check out this government guide.
Contractors that fall under IR35 in the private sector will face considerably larger tax bills as they will be subject to PAYE tax and National Insurance. This is bad news for the 170,000 self-employed contractors out there operating within the private sphere.
Although these contractors will be required to pay tax like an employee, they won’t necessarily receive the benefits enjoyed by them such as statutory rights like holiday pay, sick leave and maternity or paternity pay.
How is my IR35 status decided?
There are certain ‘tests’ that are used to determine the contractor’s IR35 status, amongst others these include:
- Control: this looks at the degree of control the contractor has over the work they carry out for the client. For example, when a contractor is free to decide how the contract gets completed or can perform the contract to their own schedule, it is likely that it will be decided that they have the right degree of control over what they do and would therefore be outside IR35. Things to look out for in the contract that may lead the contractor to be considered more of an employee and inside IR35 include: it is stated that the contractor will be supervised by a manager or other figure, work start and end times are included in the contract, staff benefits like holiday pay or sick leave are outlined.
- Substitution: for a contract to fall outside of IR35, it must state that the contractor has the right to send a substitute to carry out the work on their behalf.
- Obligation: if a contract states that the contractor cannot work with another client whilst undertaking the current contract, it could mean you will be considered inside IR35.
How can I avoid IR35?
With changes to IR35 looming ever closer, thousands of contractors currently operating in the private sector will naturally be feeling anxious about these upcoming changes. After all, if they are determined to be inside IR35, they will still operate as a self-employed contractor, but lose the tax advantages to doing so.
What’s more, many larger clients have publicly stated that they intend to stop using the services of limited company contractors altogether, to avoid getting caught up in IR35.
If you are worried about upcoming changes to IR35 and want to know how you can avoid it, the answer is to go umbrella.
An umbrella company will employ the contractor, meaning they are put on the company’s payroll, paid a salary and taxed through PAYE. As such, they are entitled to statutory benefits and have business and admin tasks such as invoicing taken care for them.
The contractor can still enjoy the flexibility of working as a contractor, being free to choose which contracts they work on and when, however as they are employed by the umbrella company, they are automatically exempt from IR35, meaning no nasty surprises.
If you are a limited company contractor considering making the move to umbrella due to upcoming reforms to IR35, Umbrella Broker can help you find the perfect umbrella company to work with.
