Contractors and IR35 Rules

Companies in the UK who make use of contractor services have to be prepared for new income tax reforms. On April 2020 due to the changes in the budget, large and medium-sized businesses are now bound by the rules of IR35. This is an overhaul of the taxes that are implemented on the contract workers employed by private companies. This is a revenue-increasing measure implemented by the chancellor Philip Hammond after he introduced the same reform in the public sector in April 2017. This serves as a crackdown on the employees who are under the so-called “disguised employment.” This is when the company hires contractors and let them work as regular employees, yet letting them pay less taxes.

Defining IR35

IR35 legislation aims to determine if a non-payroll employee is a bona fide contractor or is directly hired by the company he or she is working with. The HM Revenue and Customs has different tests to determine this which include testing if an individual will be able to substitute someone else to accomplish the work. This test will also determine if the worker has control on his or her working practices and timing. Companies that work with contractors may use an online tool called CEST or Check Employment Status for Tax to check if the IR35 applies to the individual contractors.

New Reforms in the IR35

Budget changes will bring forth the IR35 in private sector right into the public sector. This is done through shifting the liability of defining if a worker is considered employed or self-employed from the worker to the organization that engages them. Organizations that are seen to disobey the rules have to pay taxes and fines that can amount to hundreds of pounds.

Inside IR35

If you are contracting IR35 inside or what is called as “Inside IR35,” it means that for tax purposes you are employed by your end client and you are subject to PAYE. You have to ensure that you are paying your taxes appropriately. Your tax includes the income tax given by the end of the tax year. You also have to reassess your employment status whenever there is a change in your working practices and when you are starting on a new contract.

If you are working in the public sector, the fee payer will be tasked to deduct your tax and your NICs at source. Determination for those in the public sector will be done by the end client based on the 2017 off-payroll rules. A lot of agencies are not capable to manage contractors by way of payroll; thus there are many who will try to engage you through an umbrella company which may serve as your employer for a certain fee.

If you are found out to be inside IR35 after an IR35 inquiry, HMRC will instigate a determination of your income tax, interest, NICs, and a penalty may be given to you which should have been paid during the said accounting period. This can amount to tens and hundreds of thousands.