The UK’s amended IR35 law came into effect on April 6th 2021. Also known as the off-payroll working rules, IR35 determines how an independent contractor should be taxed. Its initial purpose was to stop individuals (not companies) from paying less income tax.
The key change is that private sector companies will now determine an individual’s IR35 status, rather than the individual themselves. Generally, an independent contractor classed as falling inside IR35 will have to pay taxes and National Insurance (NI) contributions deducted through their payroll. However, this does not make them an employee.
International companies with no presence in the UK won’t be affected and won’t have to determine a contractor’s status. However, they will have to deduct a UK contractor’s taxes and NI contributions through their payroll if the contractor falls inside IR35.
As you can already tell, IR35 is infamously complex and the new regulation isn’t necessarily going to make this any easier. We’ve outlined the main IR35 changes so you can decide whether contracting in the UK is the right option for you
Who Decides a Contractor’s IR35 Status?
One of the main IR35 changes this year is that companies will now determine the IR35 status of an independent contractor. If an individual is found to fall inside IR35, they will be taxed and pay contributions in the same way as an employee.
This has been the rule for the public sector for a while and will now apply to the private sector too. Specifically, middle and large-sized companies will be responsible for determining the IR35 status of contractors they hire.
A medium to large sized company is defined as such if they meet 2 or more of the following criteria:
- an annual turnover of more than £10.2 million
- a balance sheet total of more than £5.1 million
- more than 50 employees
Balance sheet turnover refers to the total amount of assets before deducting any liabilities.
Contractors working for small companies will continue to determine their status themselves.
Whom do IR35 Changes Affect?
IR35 Changes affect both medium and large client companies and independent contractors working in the private sector.
However, the ruling does not apply to companies with no presence in the UK. This means your company does not have a subsidiary or any other form of permanent establishment (PE) in the UK. But remember: you will need to check whether the work your independent contractor does for you triggers a PE for your company. As soon as this happens, you will have to pay corporate taxes in the UK and determine whether your contractor falls within IR35 or not.
What are the Criteria for falling inside IR35?
Supervision, Direction and Control
These refer to the degree to which client companies oversee the work that is completed by a worker, such as how, where and when they complete their work. If a client company has no say over how a contractor completes their work, then the contractor is classified as outside IR35.
Right of Substitution
Contractors should have the right to send somebody else who is equally qualified and skilled in their stead to complete work for a client. If they cannot do so, they are more likely to be classified as inside IR35. Moreover, if a contractor is being hired for their specific skill set and cannot be replaced by anybody else then they are more likely to be understood as falling inside IR35.
Mutuality Of Obligation
This means that the client company needs to offer work and the worker needs to accept it. Contractors outside IR35 are allowed to end a contract part of the way through and have no obligation to continue working for a client after the work is completed. Provisions for extending contracts should be avoided. Contractors outside IR35 are also able to work for other companies, including competitors.
Other relevant factors include how a worker is paid (regularly or after projects are completed), whether a worker is using their own or provided equipment, and whether regular, guaranteed work is provided. Though it is not binding, the government has provided a tool to check the employment and IR35 status of workers.
Payroll for IR35 Individuals
Contractors falling inside IR35 must be taxed and pay contributions via PAYE, the UK’s national payroll system. This means that companies or agencies are responsible for deducting taxes and contributions before paying out an individual’s salary, whether the company is based in the UK or abroad. Workers inside IR35 will not pay income tax or contributions more than once.
Dealing with Disagreements
It is now a legal requirement that companies hiring independent contractors have to provide a status disagreement process by which individuals can contest their status determination. You will have to define a policy for this and inform your contractors. You will have 45 days to respond to a contractor from the day you receive their disagreement.
Is Contracting in the UK Right for You?
IR35 is meant to raise funds in taxes for the government by ensuring particular contractors are paying the same taxes as employees. But the onus is still on you to make sure this happens.
This is a huge bureaucratic burden. The new IR35 changes also don’t provide protection and job security for an independent contractor inside IR35. You may be dealing with more status disagreements in the future and potential legal battles. So while hiring independent contractors has largely been considered the safer and cheaper alternative to employment, it is now actually proving to be much more risky.
Fortunately, Omnipresent can help you employ the right talent compliantly in the UK! We offer a global employment solution that goes above and beyond your standard PEO or EOR. Operating all around the world, including the UK, we can help you shoulder some of the weight of compliance by employing on your behalf.
Our process is simple. You tell us who you want to hire and we take care of all the HR admin and payroll to make it happen. Our services include:
- Onboarding & Onboarding
- Payroll & Taxes
- Benefits & Welfare