IR35 – are you ready?
Posted on 6th April 2021
The new IR35 tax changes came in to effect this month for the private sector. Some self-employed people and the businesses they work for will now have to pay taxes in a different way.
However, more than a third of self-employed people are unaware of the changes and nearly three quarters of those affected haven’t done anything to prepare.
Here we answer some of the common questions about IR35.
What are the IR35 changes?
The changes were introduced in the public sector in 2017. Government plans to introduce them in the private sector in April 2020 were postponed due to the financial impact of the coronavirus pandemic but they have now been applied.
IR35 refers to the off payroll working rules that aim to ensure that contractors and the businesses that use them are paying the correct tax. HMRC believes that thousands of people employed via a Personal Services Company (PSC) or other intermediaries haven’t been paying the right amount of tax. In their view many contractors should be paying the same amount of tax as employees and businesses should be paying their share too.
What are the IR35 rules?
You will be covered by the new IR35 rules if you would be considered as an employee of a company without the PSC in place.
Are you unsure whether you or someone you employ is affected? The new rules will probably apply if:
a company has control over how work is completed such as working hours and/or where the work must take place.
a company is obliged to give someone more work once they’ve finished a task and that person must do the work.
To be outside the IR35 rules there should be a clause in your contract to say you can substitute someone else to do the work and that you would oversee them.
Since 6 April, all public sector authorities and medium and large-sized businesses in the private sector are responsible for deciding whether IR35 rules apply. If a contractor provides services to a small private sector client, the contractor’s PSC or intermediary will be responsible for deciding if the rules apply.
Why have the IR35 changes been introduced?
Tax rules for self-employed people mean that the Treasury could miss out on income tax and National Insurance (NI) contributions from both the contractor and the hiring company. Basic-rate employees pay 20% tax on income above the personal allowance up to £50,270 this year. They will also pay 12% in National Insurance on earnings between £9,568 and £50,270 and 2% on any earnings above that. Employers also contribute 13.8% in NI payments above the £9,500 threshold for each on-payroll employee.
However, if a self-employed person works in their own limited company, they can pay themselves a small amount to avoid or significantly reduce the amount of income tax and NI they pay. They can top up their salary with dividends which are taxed at a lower rate. By doing this, instead of paying income tax rates of between 20% and 45% on their salary they might pay between 7.5% and 38.1% on dividend income. The Treasury has estimated that, if the situation is unchanged, it could be losing up to £1.3billion a year by 2023.
What is the impact of IR35?
A consultation in 2019 found that affected contractors could lose up to 20% of their income because of the changes. The Treasury conducted a review into the IR35 rules in March 2020 and announced changes to help contractors and businesses prepare.
A ‘light touch’ approach to enforcement will be in place during the first year for inaccuracies relating to the IR35 rules. However, anyone who deliberately fails to comply can be penalised.
The HMRC won’t use information submitted because of the changes to launch new investigations into PSCs for tax years before 6 April 2021 unless there’s a reason to suspect fraud or criminal behaviour.
Up to 170,000 people supplying services through PSCs or intermediaries could be affected. Up to 60,000 private-sector organisations with 50 or more employees and a turnover of more than £10.2million are estimated to be using contractors covered by the IR35 rules along with 20,000 recruitment agencies.
Please get in touch if you are unsure whether the new IR35 rules apply to you.
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