Out of all the recent changes to UK tax law, the changes to IR35 are up there as some of the most confusing.
The changes to the long-standing rules covering off-payroll working were introduced to the private sector in April 2021, with the Government promising to be lenient on mistakes for the first year.
This grace has now ended, however, so it’s important you understand how IR35 works for you in 2022.
With this handy guide for IR35, you’ll understand all your new obligations and how to stay on HMRC’s good side.
What is IR35?
IR35 is a set of employment rules that are designed to prevent tax avoidance by the self-employed who work for a business through a personal company but are essentially an employee.
The rules require off-payroll workers to pay the same rates of income tax and National Insurance contributions that regular employees on payroll pay.
That’s because the Government thinks some off-payroll workers are essentially treated like employees who enjoy all the benefits of full employment but pay less tax through their personal company.
IR35 is actually the name for an older set of employment laws introduced in 2000. However, they were difficult to implement to the dismay of critics.
As a result, reform came in 2017 for the public sector. The change made it so employers now have the duty of the true employment status of a contractor they hire out. This rule came into force on 6 April 2021 for private sector companies that meet 2 or more of the following conditions: Annual turnover of more than £10.2 million; balance sheet total of more than £5.1 million; more than 50 employees.
In the past, the contractors themselves were the ones to determine their employment status, something the Government clearly decided wasn’t working out too well.
When should you determine if a contractor is inside IR35?
An employer should place a contractor ‘inside IR35’ when they use the new rules and criteria to determine that a contractor is actually an employee for tax purposes.
Someone is inside IR35, if:
- the contractor has to carry out the work themselves and cannot send a substitute in their place
- the employer has a degree of control over when and how the job is carried out, rather than the contractor setting their own schedule
- there is a mutual relation between the employer and contractor – one has to provide work and the other has to complete it.
While this is a good starting point, there are other factors to consider. You also need to remember that IR35 is judged on a contract-by-contract basis.
This means that the same contractor can carry out multiple jobs, with IR35 only applying to some but not all.
Will IR35 rules change again in 2022?
IR35 has always been controversial and, even now, it continues to receive heavy criticism.
A lot of people think it could have serious consequences for the labour market, with some businesses choosing to abandon contractors altogether, rather than risk making a mistake.
Earlier this year, the House of Lords published a set of recommendations to improve IR35.
These included modifying the Government’s online CEST (Check Employment Status for Tax) tool to include questions about mutual obligation. It also suggested more research should be conducted into the economic impact of IR35 in light of COVID-19.
Despite this, it seems IR35 will remain the same for the foreseeable future. In response to the House of Lords, HMRC talked about “learning lessons” rather than major changes.
So, IR35 is here to stay as it is for now.
Contact us for help with IR35.