What is IR35?
When employees and independent contractors work together in an organisation performing the same tasks, lines become blurred. The government introduced IR35 tax legislation as a way to help bring a sharper definition to a contractors employment status for tax purposes. Keep reading to learn more about the latest IR35 rules and how theyre applied. IR35 describes tax legislation introduced in 2000 to prevent tax avoidance. These rules apply specifically to contracted workers supplying services to clients through an intermediary company. Without the use of this intermediary, the contractor would simply be an employee. Workers who fall under this category are called deemed employees by HMRC, and according to IR35 rules they must pay the same National Insurance contributions and income tax as any other employee. IR35 was brought into tax legislation to prevent tax avoidance by contractors operating as employees in everything but name, a growing problem in the gig economy. For example, a consultant might operate through a limited personal services company to pay less tax, yet still works in the clients office Monday through Friday just as a regular employee on the payroll might. Under IR35 rules, an intermediary might be any of the following:  Personal service company  Individual  Partnership  Workers supplying services through these intermediaries must pay the same National Insurance contributions and taxes as employees would. There are three main groups impacted by the IR35 tax rules:  Agencies providing services through intermediaries Clients who receive worker services via an intermediary Workers providing services to clients through an intermediary  There are a few ways to determine a workers employment status. For tax purposes, all workers are either employed or self-employed. Self-employed contractors do not have to worry about IR35 rules, while employed workers must pay all applicable fees. If the answer to any of these tests is yes, then it indicates to HMRC that there is some form of employment relationship. However, its important to look at the bigger picture to determine employment status. Self-employed workers will usually have their own separate office, business website, job titles, and other indicators of separation from the client. The original IR35 legislation is in the process of being replaced with a new off-payroll tax, which will still be referred to as IR35. Under the newer rules, firms must assess each contractors employment status while paying employment tax on top of the usual contractor fees. This new employment tax is the off-payroll tax. The off-payroll tax came into effect in 2017 for the public sector, and will impact the private sector starting in April 2021. These changes are meant to streamline the rules and reduce unfair hardships on legitimate small businesses. Its important to note that the new off-payroll rules will apply on a contract-to-contract basis. Some contracts might fall within these regulations, while others dont. Rules before April 2021  Under the old rules, the employment status of workers with clients in the public sector was decided by the client. However, if youre a worker with a client in the private sector, it will be your intermediarys role to determine employment status. Private sector clients could include third sector companies like charity organisations. Rules after April 2021  By contrast, when the new IR35 rules take effect in April 2021 all public and private sector clients are responsible for determining employment status. The exception would be when a worker provides services to a smaller-sized private sector client. In this case, the intermediary determines employment status as before. How to avoid IR35 taxes  Because rules are applied on a contract-to-contract basis, theres no single answer for those wondering how to avoid IR35 taxes. Companies could hire all contractors using fixed-term employment contracts, but this would require the company to still pay all extra employment taxes as a result. Firms can hire self-employed contractors to avoid IR35 taxes, because self-employed individuals are responsible for filing and paying their own income tax. If youre not sure what category you fall under, use the Employment Status Checker on the HMRC website to find out. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.