We know IR35 has been through a period of change and is likely to go through more. It is a confusing part of UK tax law, one which we constantly get asked about.
With longstanding changes made to off-payroll working in April 2021, the Government showed leniency towards the private sector’s mistakes in that first year.
But in a recent change of heart, as part of the September 2022 mini-budget, the government decided to renege on its previous initiative and revert to the old reporting method on IR35.
A reminder – what is IR35?
IR35 is a set of employment rules designed to prevent tax avoidance from self-employed individuals who work for businesses through their own personal company but still essentially act as an employee.
These rules require any off-payroll worker to pay the same income tax rates and Nation insurance that a regular employee would do if he was employed.
The Government views off-payroll workers that are treated like employees as if they actually were employed by the company. In their view, if you get the same benefits, you should pay the same tax.
Introduced in 2000, the original implementation of IR35 was difficult for the Government and received lots of criticism.
In 2017, IR35 was reformed in the public sector, meaning employers now have a duty to reflect the actual employment status of any contractor they use. Enacted on the 6th of April 2021, IR35 applies to private sector companies if they meet two 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.
But as of 6 April 2023, contractors are now again responsible for determining their employment status.
So when is a contractor ‘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 schedule
- there is a mutual relation between the employer and contractor – one has to provide work and the other has to complete it.
This works as a good starting point, but you must remember that IR35 is evaluated on a contract-by-contract basis.
The same contractor can carry out multiple tasks, each being judged independently of the others. Some may comply with IR35, others may not.
How likely are more changes?
The Government was not expected to make changes to IR35, especially so soon into their new tenure.
The decision was a pleasant surprise for groups like the Association of Independent Professionals and the Self-Employed (IPSE), which had been campaigning against the legislation for a number of years.
They did, however, comment: “As delighted as we are with the news, we remain concerned that the underlying IR35 rules will stay in place, and we hope to work with the Government to make further progress on this issue in the weeks and months ahead.”
Others have warned the move will open up opportunities to exploit the tax system, and have argued the existing rules should be maintained.
It’s possible the months and years ahead could see further adjustments to the rules, or even a complete overhaul – as with many political and tax changes, you never really know.
Whatever happens, we’ll keep you informed on the latest changes.
Get in touch with us today to discuss IR35 and how it may affect your business.