Navigating off-payroll working rules: A closer look at IR35 legislation

Off-payroll working, commonly referred to as IR35, has long been a subject of discussion within the UK business community.

Despite being in force since 2000, IR35 continues to present challenges for contractors, freelancers, and the companies that engage them.

What is IR35?

IR35 is a piece of UK tax legislation designed to combat tax avoidance by workers supplying their services to clients through an intermediary, such as a limited company more commonly known as personal service companies, but who would be an employee if the intermediary were not used.

Essentially, it ensures that these workers, referred to as ‘disguised employees’ by HM Revenue & Customs (HMRC), pay roughly the same Income Tax and National Insurance contributions as actual employees.

Why does IR35 matter?

IR35 is crucial for both freelancers and the businesses that engage their services (engagers) because it affects tax liabilities.

Non-compliance could result in significant financial penalties and interest on unpaid taxes.

Furthermore, the rules around IR35 changed in April 2021, bringing the rules to the private sector and shifting the responsibility of determining a contractor’s status from the contractor to the client for medium and large-sized businesses.

It is important to note, however, that if the engager is a small business, then they will have an IR35 exemption. To receive the exemption, they must meet two or more of the following conditions:

Have an annual turnover of less than £10.2 million
Have a balance sheet turnover of less than £5.1 million
Have less than 50 employees

If they do not meet two or more of these conditions, then the business will be classed as medium or large and so will be responsible for the IR35 off-payroll rules.

Determining IR35 status

Determining whether a contractor falls within IR35 involves several key factors, often referred to as ‘tests of employment’:

Control: Does the client have control over how, when, and where the contractor performs their work?
Substitution: Is the contractor free to send someone else in their place to complete the job?
Mutuality of obligation: Is the client obligated to offer work, and is the contractor obligated to accept it?

If the answer to these questions aligns more closely with traditional employment rather than a freelance or contract relationship, then IR35 may apply.

Implications for contractors

If a contractor falls inside IR35, they will need to pay Income Tax and National Insurance contributions as if they were an employee.

However, they typically will not enjoy employment rights like holiday pay or sick leave, creating a less-than-ideal situation.

Tips for contractors

Seek professional advice: Given the complexities, consult a tax advisor familiar with IR35 legislation.
Contract review: Ensure your contracts are drafted clearly to show whether or not IR35 should apply.
Insurance: Consider taking out IR35 insurance to cover potential legal costs and tax liabilities.
Fees: Many contractors choose to charge more for their services when they are inside IR35 legislation so as to cover their additional Income Tax and National Insurance costs.

Implications for engagers

If you’re a business engaging contractors, you may be responsible for determining their IR35 status and possibly liable for unpaid taxes if found non-compliant.

Tips for employers

Due diligence: Conduct an IR35 assessment for every contractor you engage.
Record-keeping: Maintain thorough documentation of your IR35 assessments and the reasoning behind them.
Legal advice: Consult legal professionals to ensure your contracts are IR35-compliant.

IR35 is a complex but unavoidable aspect of the UK tax landscape that engagers and contractors alike need to understand.

If you would like guidance on IR35 legislation and what it means for you, please contact us today.