Changes to IR35 rules for IT contractors come into force in April 2021
When working as or engaging with any contractor, it is important to keep up to date with the latest legislation from HMRC. Updates to tax law impact both worker and client alike, and it takes time to prepare for impending changes. The most significant update to hit the IT industry recently is a change in IR35 rules, otherwise known as ‘off-payroll working’. These changes were due to come into place in April 2020, but due to the coronavirus pandemic, they will now come into effect in April 2021 to give both businesses and individuals a chance to deal with the economic impact of the crisis.
However, with the implementation of the new rules now less than six months away, it is important to get to grips with how these changes could affect you or your business.
What is IR35?
The off-payroll working rules (IR35) have been around since 2000, applying to contractors who do not meet the conditions for self-employment. For example, if you own a personal service company through which you offer your services, you would be considered both the owner and an employee of your company. Working through a personal service company can be more tax efficient, but doesn’t give the usual employee benefits like paid holidays or sick leave.
In 2000, HMRC introduced the IR35 rules to tackle what it called ‘disguised employment’. Essentially, a company engages a contractor through their personal service company (or another intermediary, such as an Umbrella Company), but for all intents and purposes the contractor is engaged by the end user/hiring company. By doing it this way, the hiring company doesn’t have to pay its usual National Insurance contributions as an employer or give the contractor any employee benefits.
The IR35 rules, aim to make the playing field more level so that the National Insurance and tax payable by a contractor is brought into line with what an employee would pay. It is complex legislation that can be difficult to understand for both hiring companies and contractors – you should always seek professional guidance around IR35 implementation. In the simplest terms, HMRC says that the rules apply if a contractor would be an employee if there was no intermediary (such as a personal service company) involved in the hiring process.
Inside or outside IR35?
When working with or as a contractor, the role will either be defined as ‘inside IR35’ or ‘outside IR35’ by the hiring company. Inside IR35 means that the rules apply to the contractor, who must pay the same tax and National Insurance contributions as an employee. Outside IR35 means that the rules do not apply.
In the public sector the hiring company is already responsible for determining a contractor’s IR35 status and ensuring the correct tax and National Insurance Contributions are paid. In the private sector, the contractor is currently responsible for determining IR35 status. As of April 2021, however, medium and large private sector businesses will be brought into line with the public sector and will take on the responsibility for determining the IR35 status for each role. Contractors retain the responsibility only where engaged with small private sector businesses.
When listing a job role on a recruitment website, such as Spectrum IT Recruitment, as a hiring company, you should already have determined whether the role will fall inside or outside IR35 legislation and include this in the job description. If you are searching for a new contract role, look for an IR35 declaration on the job description or ask the hiring company if it’s not clear.
If you are currently operating as an IT contractor, you should definitely consider getting professional advice on your IR35 status – it might not be the same for all your current and future service contracts.
It is important to note that IR35 is complex. It can be difficult to traverse as either the hiring company or the contractor. This guide is purely informational, and we are not able to give out any specific advice. If you have questions or concerns, speak to an IR35 expert, who can review contracts and give appropriate advice.