What is IR35?
IR35 (also known as Intermediaries Legislation) is legislation created to identify individuals falsely establishing limited companies as a means to reduce their national insurance (NI) payments and taxes. This is often referred to as “disguised employment”.
There are a number of rules that aim to determine whether your contract falls inside or outside of IR35. If your contract is ‘inside’ IR35, you will be taxed as if you were a permanent employee – either via your client’s payroll or through an Umbrella Company. If your contract is ‘outside’ the legislation, you would be considered truly self-employed and would be able to structure your income so as to benefit from the tax efficiencies available through the use of dividend payments.
For this reason, many contractors prefer to work on contracts that are found to be outside of IR35.
Who decides on IR35 status?
If your contract is in the Public Sector, the end hirer will be responsible for assessing IR35 status, but for Private Sector contracts (until April 2020), that responsibility sits with the contractor. The entity making the IR35 determination is also liable for any fines if they are found to have got it wrong (through and HMRC investigation).
From April 2021, the rules around IR35 in the Private Sector will be bought in line with those for the Public Sector, with the end hirer making the determination across the board.
What does the April 2021 change mean for contractors?
The rules used to determine IR35 status are not changing, so in theory, if you are legitimately contracting through as Limited Company now, then you should be able to continue to do so post-April. However, our experience of the changes being implemented in the Public Sector suggest that some end hirers may take a more risk averse stance, deeming a larger proportion of contractors as inside IR35 as a result.
This may result in some contractors temporarily needing to work on a PAYE basis. One of the ways of doing so is through an Umbrella Company which effectively creates an overarching contract between you and the hirer and deals with your admin, tax and payroll. The hirer pays your Umbrella Company who takes off their fee, National Insurance and income tax and passes what’s left on to you. You’re effectively taxed as an employee.
For these reasons, many contractors may find themselves needing to switch between their Limited Company and an Umbrella Company at short notice, while they challenge a client’s determination, look for a new contract or negotiate their fee to cover any take-home pay shortfall.
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