The IR35 tax legislation also referred to as off-payroll working rules, changed on 6 April 2021. Since then, all public authorities, medium and large-sized clients are responsible for deciding the employment status of workers (sometimes known as contractors) and collecting appropriate taxes if IR35 rules apply.
This means that certain businesses that use contractors must assess and determine the employment status of contractors that they work with for tax purposes. If a contractor is found to be working as a 'disguised employee', the business will be liable for any unpaid taxes.
As a result, if you use workers that provide their services through their own limited company or another type of intermediary, you need to be aware of the IR35 rules and regulations in the UK, and what this means for your business.
If you use limited company contractors, self-employed people or partnerships to provide the services you need, read on to see if your business is affected by IR35 and what you must do.
IR35 is a set of rules that apply to contractors who work through their own limited company or another intermediary, and the companies that use their services. The rules are designed to make sure that contractors who work like employees but operate through a company, a partnership, a personal service company, or as an individual, still pay the same national insurance and income taxes as employees.
Off-payroll working rules for clients, workers (contractors) and their intermediaries are important in preventing tax avoidance by so-called 'disguised workers' who would be classed as employees if they were directly engaged by the client.
If your business meets two or more of the following conditions, the IR35 rules apply to you and you must understand your IR35 responsibilities when working with contractors:
Additionally, you must apply the rules if you have an annual turnover of £10.2 million and are not a company, LLP, unregistered company, or an overseas company.
Following the end of an initial 12-month grace period to allow the changes to bed in, businesses that now fail to comply with the rules could be fined up to £3,000 per contractor, and repeat offenders could face criminal prosecution. Businesses are advised to take steps to ensure they have assessed their workers’ status and that they are fully compliant if IR35 applies.
If you are a public authority, medium or large-sized organisation outside the public sector and you receive the services of a contractor, you are known as the client, engager or hirer. From 6 April 2021, you are responsible for deciding a worker's employment status and if IR35 rules apply. You can use HMRC's ‘check employment status’ tool to aid your decision.
Under IR35, a contractor is considered to be an employee of the organisation they are contracted to if they would be considered an employee if they were not working through an intermediary. HMRC states that ‘If the rules apply, you must apply them from the start of the tax year following the end of the calendar year when you met the conditions’.
Working with contractors can be a great way to get work done quickly and efficiently without the usual overheads of employees, but there are some things to keep in mind when working with contractors to ensure you don’t fall foul of these important tax regulations.
By following these simple guidelines, you can ensure a smooth and successful experience when working with contractors and ensure that you meet your obligations under IR35.
If your business uses contractors and you meet two or more of the qualifying criteria, you need to be aware of IR35, as the rules can have a significant impact on the way you work with contractors. If you have any questions about IR35 or how to manage working with contractors, please speak to Neathouse Partners for advice.
Our expert team can help you to ensure that you have the tools, knowledge and procedures in place which means you can work with brilliant contractors whilst minimising the risk of fines or non-compliance arising regarding contractors and IR35.