Whilst IR35 has been around for over 20+ years, recent changes to the legislation have been causing a lot of uncertainty for Ltd company contractors and their clients. In this article, we answer some of the most frequently asked questions about these changes.
IR35 was implemented to ensure that workers, who would have been an employee if they were providing their services directly to the client (contractors), pay broadly the same Income Tax and National Insurance contributions as employees.
As of 6th April 2021, HMRC made a couple of significant changes to this legislation. Firstly, clients and the contractors’ intermediaries became responsible for deciding the contractor’s employment status. Secondly, the responsibility to make sure the contractors are paying the correct taxes falls on the end clients and the contractors’ intermediaries.
Will IR35 affect me?
If you’re a contractor and your requirement falls inside IR35, these changes will affect you. As of April 2021, your client or intermediary became responsible for determining your IR35 status. You can read more about the IR35 determination criteria here.
If you employ contractors, the changes to IR35 will have an impact on your business.
You are now responsible for ensuring the IR35 statuses of all your contractors are accurate. You’ll need to invest time and resources into investigating your current workforce to ensure you remain compliant. You will also need to have a reliable determination tool in place for future contractors.
It’s also likely that contractors are going to increase their rates. As you’re probably aware, we’re in a candidate led market and the pool of contractors applying for roles inside IR35 is relatively small. To maintain the same level of net pay especially after footing the bill for the employers NI (13.8*), many contractors are increasing their rates for roles inside IR35.
If you want to continue to use a flexible work force there is a solution. Talent Locker have partnered with an insurance company who are able to assess your current contractor work force and your business processes, provide you with a credible determination tool, and an insurance which indemnifies you against an outside result. For more information please get in touch.
IR35 Determination Criteria
There are four key areas that a contractor will be assessed on:
Right of substitution + termination (has to be genuine)
- Resource needs to have the right to substitute if a genuine reason
- Client needs to accept the substitute as long as it’s reasonable
Control + supervision/direction
- Overall deliverable needs to be met/hit only. Not day to day activities
- No specific working hours
- Service provided to complete statement of work per day
- Need to provide equipment however only if IT Security permits
- Software/tools required might be on company property only
- BYOD policy needs to be strong
Mutuality of Obligation
- Consultant has the right to say no to additional work
- Can agree to take on additional projects if approved and new statement of work signed
Finance Risk & Opportunity to profit (statement of works)
- Budget for project (3 months) based on deliverable / work statement
For a role to sit outside of IR35, your role and the contract would need to meet a number of these requirements.
When will IR35 be implemented?
Whilst IR35 has been in place since April 2000, there was a significant change to the legislation which was implemented in April 2021. As of April 2021, the responsibility now falls with the end client to ensure the contractor pays the correct national insurance and tax payments.
In preparation for these changes, businesses should review their processes, the IR35 legislation, and make sure they’re compliant come April 2021.
Who is responsible for IR35?
Prior to these changes to IR35, contractors were responsible for ensuring they followed all the right processes. As of April 2021, this responsibility will fall on the client and anyone within the supply chain, for example recruitment agencies or umbrella agencies.
Inside IR35, who pays Employers NI?
If the contractor operates by being on the PAYE books of a recruitment company, the recruitment company must pay Employers NI. If they operate through an umbrella company, the umbrella company must pay it instead. Regardless of who pays it, the cost will still be passed on to the contractor.
How much will IR35 cost me?
Understanding the cost implications of IR35 is incredibly important. Once this legislation is introduced, you’ll become responsible for paying employers NI, employees NI and some taxes, like income tax. The exact amount you’ll need to pay will vary depending on your specific circumstances – we advise you speak to an experienced recruitment company, accountant or FCSA accredited umbrella company to get an exact breakdown.
Can IR35 be backdated and how far back could an investigation go?
At the moment, the government says IR35 can’t be backdated. We’ve seen quite a few government U-turns in the last few years though, so you might not want to bet the house on it…
Are umbrella companies IR35 compliant?
There are well over 500 umbrella companies in the UK. Whilst many of these will be IR35 compliant, it’s not guaranteed.
To be safe, we’d always recommend choosing one that is FCSA accredited. FCSA accredited umbrella companies have been through a rigorous vetting process to ensure they are compliant.
At Talent Locker, we only work with FCSA accredited umbrella companies. Here you can find a list of FCSA accredited umbrella companies.
If you’ve been affected by IR35 and would like any advice, speak to our IR35 expert, Sarah Moody.