To say IR35 has been a point of contention over the last few years would be an understatement.
Having gone through multiple reforms, the off-payroll working rules have caused confusion for people working in the construction industry – and their accountants, too.
At the tail end of last 2022, the Government announced that it would repeal some of the controversial changes to IR35. Only a matter of weeks later, the current Chancellor, Jeremy Hunt, decided the repeals wouldn’t go ahead.
Due to the constant changes, or lack thereof, it’s essential to understand how you’ll be affected by IR35. Here’s what you need to know.
How IR35 works
IR35 was introduced in the 2000 Finance Act to end contractors working off-payroll and ensure they pay the same amount of tax as a regular “deemed employee”.
Any contractor who does not meet HMRC’s self-employment criteria will fall within the scope of IR35.
IR35 status indicators
Before HMRC decides whether you are inside or outside IR35, it will look at three main areas.
The first is the right of substitution. Substitution is a contractor’s ability to provide a replacement worker to continue the service under the existing contract.
Secondly, there is the mutuality of obligations, which means both parties will have an obligation to provide a working contract and the actual service delivery.
Lastly is the level of control. This examines whether the worker is truly independent when working under the contract. The more independent a worker is, the less likely IR35 will apply.
Inside IR35
If you’re inside IR35, HMRC doesn’t see you as self-employed. You’re considered an employee by your end client, and your taxes and National Insurance contributions (NICs) will be deducted through your employer’s PAYE scheme.
Outside IR35
As a worker outside the IR35 rules, HMRC will see you as a legitimate business, meaning you’ll be paid a gross total for your work and be responsible for meeting your tax obligations.
How has IR35 changed?
The first major reform to IR35 came into effect in April 2017, specifically to the public sector. This change meant that IR35 status was no longer decided by the contractor but by the public sector client instead. If the client decided the contractor was inside IR35, the contractor company would deduct tax at the source.
In April 2021, IR35 reforms extended to the private sector. Just like the 2017 changes, the IR35 status of a contractor is now the onus of the private client.
Previous Chancellor Kwasi Kwarteng announced in his controversial mini-budget in September 2022 that the Government would scrap the reforms as of this April. However, this is no longer the case, much to the chagrin of the construction industry.
Going forwards, contractors, clients and accountants must adhere to the existing IR35 rules.
Still confused?
We understand that IR35 can be a complicated thing to stick to, especially regarding your tax obligations.
Part of our work means we’re always keeping track of the effects these rules have on your finances, so if you ever need help or advice, we’re always on the other end of the phone.
Get in touch to talk about your IR35 status.
