Will the new IR35 Legislation affect you?

You may have heard that there are new rules coming into effect from April this year regarding contractors and subcontractors and something called IR35. But do they affect you? And if so, how?

So first some background….

In 2000, the government brought in some new rules called the “off-payroll working rules” which aimed to ensure anyone who should be treated like an employee did actually pay tax and national insurance. 

In particular, this was focused on contractors who had their own limited companies. However, there was still a lot of non-compliance and so from 2017 there were changes introduced for those who subcontracted with the public sector, and from April 2020 it is being extended to all private sector businesses classified as ‘medium’ or ‘large.’

 

I’m a Small Business/ Sole Trader, does this affect me? 

No, this particular legislation only affects contractors who work through an ‘intermediary’, e.g. your own limited company (also known as a personal service company or PSC.)

(For reference, a small business is one which is earning less than £10.2 million turnover a year, has less than 50 employees and/or has less than £5.1 million in assets). 

Please note that, although this legislation does not affect you, it is very important that you regularly review whether any subcontracted staff should actually be on your payroll instead (for example if their situation is similar to what an employee’s would normally be – check the rules for this here) and ensure they understand their responsibilities to pay any taxes if they are a subcontractor.

 

How does it affect me if I am a Contractor? 

That depends on who you are a contractor/ sub-contractor for.

If you are a contractor for a small business, then the changes don’t affect you. However, your limited company does already have a legal responsibility to check that you are classified under the correct employment status.

What this means in practice is that you need to do a quick test (here) to determine if you are under IR35 rules or not and if it says you are then you need to let your accountant and the companies you contract for know. Please note that the answers should reflect what happens in real life. 

If you carry out work for a fixed fee, are paid at the end of a project, work for a number of different clients (often at the same time), and have control over how, when and where you work, you are unlikely to be under IR35 rules. However, if your working hours are decided by someone else and you can be told what tasks you’re working on, where you’ll be working, and how you should work, then you may well fall under the ‘disguised employee’ banner, and therefore could be seen as being under IR35 rules. 

 

What if I subcontract for the Public Sector, or a Medium/ Large Company?

In this case, the public sector body, or the medium/ large company has the responsibility to classify your employment status and they may well put you on their payroll. This means they will take tax and national insurance off the amount they pay your business first.  

You should request a “Status Determination Statement” from your client to see if you will come under the IR35 rules. (And again, let your accountant know).

There are also a few other things to note:

  • You can appeal against their classification of you as under IR35 and they must respond within 45 days.
  • If you are VAT registered, you still need to invoice your client for the VAT amount as this is not affected by the new rules.  
  • You should speak to your accountant about how your situation affects what money you can and can’t take out of the business as directors loans, dividends e.t.c.

For more information, please see these links:

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