It’s been a year since the government introduced the controversial IR35 reforms to private sector businesses in the UK; and many contractors are continuing to feel the effects.
What’s the latest in 2022? Will the new IR35 rules be scrapped soon?
And if the new legislation has passed you by… what is IR35?
IR35 – also known as the ‘intermediaries legislation’ – refers to legislation designed to tackle tax avoidance by ‘disguised employees’ via ‘off-payroll working’.
What is a disguised employee? According to HMRC, you might be a disguised employee if:
- You use an an ‘intermediary’ (such as your own limited company or an agent) to receive payments from a client (or clients) for your work, and
- You would be considered an employee of the client(s) if you had received payment directly from the client(s) instead.
In other words, if you’re working for a client as a contractor, but you’re essentially the client’s employee in all but name, HMRC might interpret you as a disguised employee.
If you’re ‘caught’ inside IR35, you’ll likely pay a higher tax bill. Income tax and national insurance contributions will need to be deducted as if you were an employee.
If the end client is a small company, your intermediary will be responsible for determining your employment status and making the necessary tax deductions.
However, under the latest rules, medium and large businesses are now responsible for identifying their contractors’ employment status and deducting the tax from their payments.
Plus, if HMRC believes you’ve underpaid your taxes in previous tax years due to off-payroll working, you could be hit with additional tax costs and penalties.
And for end clients, if HMRC believes they are enabling tax avoidance via their working relationships with their contractors, they can face criminal charges.
What’s the difference between IR35 and off-payroll working rules (OPWR)?
They’re essentially two names for the same thing; except, not quite.
IR35 itself has actually been around since the year 2000, and encompasses most of the rules we’ve discussed thus far. They’re designed to ensure that independent contractors pay the right amount of tax.
Off-payroll working rules are far more recent; having been introduced for public sector businesses in 2017 and private sector businesses in 2021 to essentially reform IR35.
They place the responsibility for determining the contractor’s IR35 status – and deducting any taxes they owe – on the medium and large businesses that hire them. (For small businesses, that responsibility still falls on the contractor’s intermediary as stated by IR35 legislation.)
So, IR35 and OPWR are essentially two different things; but even HMRC uses the two names interchangeably. For the purposes of this article, we’ll just be referring to the whole thing as ‘IR35’.
Who counts as an employee?
HMRC uses various criteria to assess whether your working relationship with your client(s) can be considered as employment, rather than contracting or freelancing.
They’ll examine the contract between the contractor’s limited company or agent and the client, the contract between the agent and the contractor, and the actual work that the contractor is providing.
Here’s the three main factors that HMRC use to decide whether or not your work falls within IR35:
- Control vs autonomy: Does your client dictate when, where and/or how you can carry out your work? Do they require your work to be supervised by one of their employees? Any one of these can suggest to HMRC that you’re a disguised employee.
- Substitution: A good IR35-proof contract will give your limited company or agent the option of supplying a qualified substitute to complete the work in your place, and a plan for how the substitute would be provided. If your contract stipulates that you and you alone must complete the work, you might be classed as a disguised employee.
- Mutuality of obligation: Does your contract imply that you expect further assignments from the client (and/or the client expects you to carry out any assignments they have for you) after the initial contract term is over? Perhaps you have a ‘rolling’ contract with no fixed end date, or you’re frequently renewing the initial contract? Any of these can indicate ‘mutuality of obligation’ and push your working relationship into IR35 territory.
Other factors include (but are not limited to):
- Exclusivity: If you’re working with multiple different clients at any one time (rather than exclusively working for a single client), it’s less likely that your work will fall within IR35.
- Equipment: Self-employed individuals are usually responsible for supplying their own work equipment. If the client supplies your equipment, HMRC will probably see you as their employee.
- Payments: Do you get paid by the client per assignment (as a self-employed contractor typically would) or on an hourly/daily basis (like a payroll employee)?
If my work falls inside IR35, do I become an employee of the client?
No; and this is one of the more contentious issues with IR35.
The rules only affect your tax liabilities. Even if HMRC considers you to be an employee of the client for tax purposes, IR35 won’t affect your actual employment status with them or your access to employment rights and benefits.
Critics of IR35 argue that this opens the door to ‘zero rights employment’.
Businesses can effectively hire contractors at lower rates and on zero-hour contracts, without giving them access to sick pay, parental leave, redundancy pay, proper dismissal procedure and other rights. Meanwhile, the contractor still has to pay tax as if they were an actual employee.
Wait, hasn’t IR35 been delayed?
It was delayed; but not any more.
The IR35 private sector reforms were due to be introduced in April 2020; but the arrival of a certain pandemic forced the government to push these plans back.
This was just a twelve month delay, though; and the IR35 changes have now been ‘live’ since April 2021.
With all the disruption of Covid over the past few years, we wouldn’t blame you if the changes have passed you by; but now is definitely the time to act to ensure your business stays outside of IR35 classification.
Where is IR35 in 2022?
IR35 remains a highly contentious issue across the board; particularly due to the poor quality of guidance coming from HMRC, and the aforementioned ‘zero rights employment’ controversy.
For many businesses in 2021, the ‘solution’ to these complex new IR35 rules was to simply ban contractors altogether. Research conducted in July and August 2021 by the Association of Independent Professionals and the Self-Employed (IPSE) found that over a third of contractors had given up on freelancing as a result of the changes.
Unfortunately, despite some pushback from a handful of MPs and a negative report of IR35’s implementation in public sector businesses from the government’s Public Accounts Committee, it doesn’t look like the changes will be rolled back any time soon.
But it’s not all bad news for contractors. The IR35 rules only apply to UK businesses, which means many freelancers (particularly digital workers who can provide their services remotely) are tapping into the international markets to keep the money coming in.
And PAYE umbrella companies have emerged as a workaround for IR35, as well as a way for contractors to gain access to those employment rights.
But watch out for unscrupulous scammers; if you want to use an umbrella company, choose one which is fully compliant with HMRC regulations.
The Freelancer and Contractor Services Association (FCSA) issues accreditations to umbrella companies which meet these compliance standards, so look out for their seal of approval. There’s also speculation that umbrella companies will soon be regulated by the government too, which should hopefully weed out the dodgy ones even further.
Need help with IR35 or simply HMRC compliance in general? GNS Associates offers expert accountants for contractors across Uxbridge, London and the rest of the UK. Call us on 0208 090 2604 or email email@example.com to find out more!