What is IR35 and does it apply to me?

Paying contractors

From April 2021, it will be up to you, as a business owner, to determine whether IR35 applies to any contractor you hire. This can be a confusing rule, and can add extra stress to your (already busy) plate. So we want to make sure you understand what IR35 is and can handle the responsibility, or get some support. 

IR35 is a piece of tax legislation which was introduced to tackle tax avoidance. It deters people from setting up a limited company to avoid paying tax and national insurance by working through the limited company. 

Under IR35, if you act like an employee and are treated like an employee then you need to be taxed like one. IR35 asks the hypothetical question “if the limited company did not exist, would the relationship between the end client and worker be that of employer and employee” 

Basically, if one of your contractors operates under their own limited company, but is in all other ways treated the same as your employees, they may need to make additional tax payments.

The responsibility for IR35 falls on you, not the person providing the work

From April 2021 the responsibility for making the IR35 decision for those working for medium and large companies will fall to the client, rather than the person who provides the work. 

This means it will be up to you to determine whether IR35 applies to any contractor you hire. If IR35 applies, PAYE and national insurance contributions need to be applied to the revenue as if the worker was an employee. However, this does not give entitlement to Statutory Sick Pay, Statutory Maternity Pay, Shared Parental Leave and Pay etc. 

The responsibility on who makes this decision is only changing for those working for medium or large companies. If you’re a small company, you needn’t worry. 

A small company is when two or more of the following conditions are satisfied in a year: 

  • The annual turnover is not more than £10.2 million.
  • The balance sheet total is not more than £5.1 million
  • There is not more than 50 employees (monthly average)

So, as a medium or large business, how do you determine if IR35 applies? 

To determine if IR35 applies to a contractor you hire, apply HMRC’s Employment Status Test

This involves assessing the following criteria:

Control – Who exerts the control? the hours of work, place of work, rate of pay, management supervision. 

Personal Service –  Is there a right of substitution (meaning they can send another worker instead of themselves). Would this substitute need to be approved? 

Mutuality of obligations –  Is there an ongoing expectation that the employer will offer work and the worker will supply it? Or an exclusive arrangement?

Integration – Are they a part of the office? Do they have a title, office space, and appear on the company website? 

Economic reality – What is the evidence that the worker is in business on their own? 

Are they Supplying their own tools and equipment? Is there an element of risk? Can they make a loss or profit? do they have their own premises?

You can use HMRC’s online tool to run through this. The trouble is these factors can actually all take you to different decisions, therefore it will need to be decided on the balance of probability – would a reasonable person determine the worker is employed or self employed?

If IR35 applies, you’ll need to issue a status determination statement to the worker and give reasons for your decision 

All reasonable care must be taken when coming to this decision – otherwise it could be deemed invalid. Once the decision has been made you must issue a Status Determination Statement to the worker if IR35 applies, this is a detailed statement outlining how their decision has been reached.

If IR35 doesn’t apply then a status determination statement is not required however it would be good practice to still issue one for referral if ever required. 

If you’re concerned about IR35 and unsure of whether it applies to you, don’t panic! We can run through your own set of circumstances and help you through the steps you need to take if necessary. Don’t struggle with these complex tax laws on your own! Talk to us first.