You’ve probably heard the term ‘IR35’ at some point, especially if you’re a contractor or you have a business that works with contractors. But please don’t switch off, we promise not to bore you with this article. We know that can be tough with tax stuff.
IR35 has actually been around for a long time but is having a bit of a spruce up ready for 2021. And couldn’t we all do with a spruce up after the sh*t show of a year that 2020 has been?!
Why does IR35 matter? Simply put, HMRC wants more tax money.
Getting back to the point of the article, we’ll try and make this a plain and simple account of IR35. Then you can get on with the rest of your day knowing you finally get what IR35 is and why you should care. Here goes.
What is IR35?
IR35 is the Government code for off-payroll working. It’s more affectionately used as the term to describe rules that stop dodgy bodgers working as limited companies or contractors when, in reality, they should be working as employees.
Why does it matter? Simply put, HMRC wants more tax money. And someone working as an employee will pay more tax than if they work as a contractor. Therefore, if HMRC finds out you’ve been working off-payroll but you should have been on-payroll, you’ll get a bill for the tax and national insurance you should have been paying. Ouch.
IR35 doesn’t mean you shouldn’t set up a limited company or work as a contractor. What it means is you need to be careful about the type of work you’re doing to make sure you’re working outside of IR35 rules.
For those of you working inside IR35 rules, you’re considered an employee for tax purposes and therefore you’re subject to PAYE. Duh duh dah.
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When does IR35 apply?
If your brain is now thinking, “sh*t, should I be worried about this IR35 stuff?” keep reading. This is the bit where we explain when IR35 is applicable. As a general rule you don’t need to worry if your contract is for services rather than employment.
If you can work whenever, wherever and however you like, you’re probably free from the shackles of IR35.
Sound vague? Yead, sorry about that. To clear up that muddy water of an explanation, it’s useful to think about some of the key principles of IR35 and check if they’re included in your contract.
- Supervision, direction, control. This is basically whether your client tells you what to do, when and how. If you have to work certain hours, that implies employment and you’d be working within IR35 rules. However, if you’re free to carry out the work whenever, wherever and however you like then you’re likely to be free from the shackles of IR35.
- Substitution. Can you get someone else to fill in for you whenever you’re not available? If you can, great, it’s outside of IR35. If it has to be you that does the work, the IR35 light is flashing.
- Mutuality of obligation (MOO). Does your client have to give you work? And do you have to accept it? If the answer is yes then it sounds a lot like IR35 will apply. Sorry about it. If you answer with a no, it’s more likely to be outside of IR35 rules.
Those are the biggies. But sadly it’s not often black and white with IR35 cases so you might need to do some more investigating.
IR35 online tool
If you’re still not sure if you’re inside or outside of IR35, there’s a handy online tool on gov.uk that you can use to check your employment status for tax. Or speak to an IR35 expert for their professional advice.
“This stuff can be boring and confusing. Remember, you don’t have to figure it all out yourself – that’s what your accountant is for!“.
– Eddie Whittingham, FounderRead more
What do the IR35 changes in April 2021 mean?
Originally there were due to be changes to IR35 from April 2020 but, with the mayhem of COVID-19, the Government decided to push them back a year. So, from April 2021 the public sector rules of IR35 will apply to the private sector. Here’s what that means:
- Medium and large businesses will be responsible for figuring out a contractor’s employment status (not the contractor themselves).
- Contractors will be told the reasons behind the decision (and can dispute it)
- Small businesses are exempt so contractors will still be responsible for figuring out their own employment status.
- To be classed as a small business, you need to meet two of the following criteria:
- Annual turnover < £10.2 million
- Balance sheet total < £5.1 million
- Employees < 50
We hope you’ve found this IR35 guide useful. And if you’ve read this far that means we didn’t bore you to tears, so it’s a double win.
For more expert guides and tips on money matters for your business, check out our Money hub.
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