What is IR35?
IR35, which is due to come into force for private sector companies from April 2021, is often inaccurately referred to as a tax. IR35 instead refers to a series of rules relating to off-payroll contract work. When a contractor falls within the scope of these rules – “inside IR35” – their income must be treated as employee income and taxed accordingly.
For contractors deemed to fall outside the scope of IR35, income can be withdrawn more tax-efficiently, via a combination of dividends and salary.
IR35 is often referred to as a tax because a worker who falls within the scope of the rules could see their take-home income reduced by between 10-20 per cent.
Who currently pays?
Contractors who provide services through an intermediary, such as their own limited company, have had to assess their own working relationship with clients and determine their own status for tax since 2000. If their work falls within the rules, they are required to calculate and pay additional tax and National Insurance Contributions (NICs).
However, HMRC has long believed that non-compliance is rife among contractors, with many thought to wrongly assess themselves as outside IR35 for tax purposes. As a result, the Treasury has moved to extend and tighten the rules.
In 2017, IR35 was introduced for contractors working for public sector organisations and, vitally, the responsibility for IR35 determinations was moved from the contractor themselves to the end client. For contractors considered to be within the scope of the rules, the organisation paying them was now required to calculate and deduct tax and NI Contributions (NICs) from their take-home pay.
Who will pay from April 6?
When IR35 came in for the public sector, contractors working for private sector clients were still able to make their own determinations. However, this is set to change from April 6 2021, when the rules come into force for private sector companies (following a one-year delay due to COVID-19).
From April 6, all contractors working for private sector companies (except those with a “small company” exemption) through an intermediary organisation will have to have their tax status assessed by their end-client.
The obvious knock-on effect of this is that many contractors will have to bear the cost of being deemed within IR35, but another impact has been companies making blanket decisions to no longer use contractors working via limited companies, in order to avoid the workload of making IR35 assessments.
Author: Steven English