Off-Payroll Working: What the Latest IR35 Change Means & How It Will Affect Your Contractor Clients
If you’re an accountant that deals with contractors, you’ll know that making sure your contractor-based clients adhere to IR35 regulations, so they pay their taxes correctly, is essential. Afterall, if they get it wrong, they could end up paying up to 25% of their net income in additional income tax and NI.
As a new addition to the IR35 legislation came out in April, it’s time to brush up on what IR35 is and why it’s needed, and then get to grips with the changes and what that might mean for you and your self-employed clients.
Quick refresher: What is IR35 & how does it work?
Established in April 2000 via a press release entitled “'IR35” (Inland Revenue 35), IR35 is a set of tax laws designed to make sure that contractors pay the right amount of tax ad NI. Its biggest aim is to establish whether a contractor is legitimately working for a company as a contractor, or if they’re actually a full-time employee, disguising themselves as a contractor so they pay less tax.
Why was IR35 introduced?
“The estimated cost to Exchequer of not having IR35 legislation is £550 million a year.” – Qdos Contractor
IR35 was brought in, first and foremost, to protect the Exchequer from lost tax revenue. But it also does the job of protecting contractors from ruthless employers, reluctant to offer the statutory worker rights, and it levels the playing field between those working through their own company, and those working as permanent employees.
How does IR35 work?
HMRC has four dedicated IR35 teams, who take on around 250 cases a year. Each case is put through several tests which look at the contractor's engagement over a particular accounting period. These tests determine whether the individual is a genuine contractor or a 'deemed employee' (an employee disguised as a contractor) who owes tax and NI.
If IR35 does apply to a contractor, HMRC will complete an assessment to establish how much tax, NI and interest are owed. This bill can often run into the thousands, so it’s essential that your contractor clients know the legislation inside out and keep up to date with any changes.
Speaking of which…
What’s the most recent change to IR35 legislation & how will it affect my clients?
The revised IR35, which was announced on 6th April 2021, has one new addition which will affect both self-employed workers and the companies that hire them.
And, although the addition to the legislation is new to the Private sector, it isn’t to the Public sector, who successfully adopted this change back in 2017.
The new IR35 rule (which is being referred to as the 'off-payroll' addition) means that instead of confirming their employment status themselves, contractors now need to get an “employment status determination” from the company they are working for. This will determine if they fall inside or outside the scope of IR35 and establish how much tax and NI they should, therefore, pay.
“Medium and large private businesses will become responsible for judging whether their contractors fall inside or outside the scope of IR35, rather than the workers themselves.” – iNews
Why were these changes to the IR35 legislation brought in?
Put simply, the new off-payroll addition to IR35 legislation is a way for HMRC to make more money through correct tax payments and NI contributions.
Before this change was implemented, IR35 allowed the contractors themselves to define their own employment status, which obviously made it easier to avoid paying the right amount of tax and NI.
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