IR35 changes set for April 2021; here’s everything you need to know

Following an unexpected delay in March, the build up to the private sector’s IR35 changes is gathering pace. After MPs recently rejected an amendment aiming to push the changes back even further, the new rules are set to be implemented in April 2021. So, we’ve taken a closer look at the changes and how they may affect you.

What is IR35?

The Intermediaries’ Legislation, or IR35, is a tax law. It is referred to as IR35 as that was the reference number for the press release that announced it. The legislation targets disguised employees who falsely position themselves as limited company contractors in order to pay less tax. This is something HMRC consider as tax avoidance.

HMRC introduced IR35 to help determine whether contractors are working through their limited companies correctly. The legislation concerns freelancers and contractors who provide their services via a Personal Service Company (PSC).

Under IR35, if certain criteria is met, the earnings of the PSC are considered a ‘salary’ on which Income Tax and National Insurance contributions (NICs) are payable. This would render you ‘inside‘ IR35. Where such conditions are not met, a contract will be deemed ‘outside‘ IR35.

How does IR35 work?

IR35 applies when three conditions are met:

  • Individual performs services for a client.
  • Services are provided under a contract involving an intermediary (i.e. PSC).
  • The services are provided under a contract between the individual and the client. This means the individual should be classed as an employee of that client.
The third point is the most contentious, often triggering uncertainty in relation to IR35 determinations. In some cases, two experts come to different conclusions on the same case. It’s dependent on how they interpret and apply past judgements from case law.

The three tests for employment status are:

  • The Right of Substitution: The right a contractor has to send a replacement to perform services for the client on their behalf. For a contract to fall outside IR35, it should specify that a substitute could complete work on your behalf. It is an important distinction when proving your status as a professional PSC as opposed to an employee.

  • Control: This is often grouped with supervision and direction. In IR35 terms, ‘control’ refers to the level of control the contractor has over the work they carry out for their client. Therefore, if you have the ability to decide how your contract is completed and can perform your work according to your own schedule; it likely indicates that you have necessary control over what you do. You could, therefore, be deemed outside IR35.

  • Mutuality of Obligation: This refers to a shared obligation between the worker and the work provider. The client is obliged to provide the work and the contractor is obliged to complete it. This legal obligation constitutes a contract of employment. If your contract states that you cannot take on another client while working for your current client, it could mean that you’re inside IR35.

Here is an example of how it works:

  1. Contractor provides services to end client via PSC.
  2. Contract stipulates that the contractor should follow set processes, complete company training, and provide the service themselves.
  3. Client provides regular work, gets a company email address, and is even issued a company laptop to complete assignments.
In these circumstances, HMRC are likely to deem the contractor as inside IR35.

What are the changes to IR35?

Changes to IR35 in the private sector will come into force April 2021. They follow similar reforms to the public sector in 2017. The new rules transfer the responsibility for assessing the IR35 status of a contract from the individual performing the work through their PSC, to their client. The changes are intended to ensure that those who bill for their services via a limited company – while working in the same way as an employee – are paying the correct employment taxes.

Under the new regulations, unless your end client is a ‘small business’, you will not be responsible for assessing the IR35 status of your contract. That decision is no longer yours and will instead be determined by your client. If your contract is within IR35, then your contract income will be subject to Income Tax and National Insurance. Therefore, your tax and NICs will be calculated – and deducted – by either your client or recruitment agent.

Those assessed as being inside IR35 will get taxed in the same way as an employee. However, they may not receive the statutory benefits that are associated with employment. This includes things like holiday and sick pay, as well as maternity and paternity pay.

Next April’s reforms were originally scheduled for April 2020, but an 11th hour delay was announced back in March in light of the UK’s Coronavirus outbreak.

How can I prepare for the changes to IR35?

There are a number of things you can do to prepare for the changes to IR35:

  • Ensure you have an authorised, up-to-date, business-to-business contract.
  • Obtain ‘Confirmation of Arrangements’ – signed by your client.
  • Keep evidence of how you acted differently from your client’s employees.
  • Behave more like a business and less like an employee.

What can I do if my contract is inside IR35?

Depending on your circumstances, here are some options if you’re likely to be caught by IR35:
  1. Continue to work via your PSC. This will be via the deemed salary model, in which Tax and National Insurance gets deducted by the entity responsible for paying your company (except in cases where the end client is classified as a ‘small business’).
  2. Take a permanent role. That is to stop contracting altogether and a take on a permanent position.
  3. Switch to an employment umbrella company. By switching to an umbrella company, you’ll have the capacity to work flexibly, whist benefitting from ample employee benefits.

Umbrella Companies & IR35

If you are employed by an umbrella company, like Danbro, you won’t get caught by IR35. The legislation specifically targets those who should be being taxed as employees, but aren’t. As a consequence, IR35 does not apply to umbrella company employees.

By working through an umbrella company, you’ll become their ‘employee’. You’ll be entitled to statutory rights. You’ll also have the invaluable asset of continuous employment – which is useful should you wish to access financial products at more attractive rates.

How can Danbro help?

Danbro are experts in IR35. Our clients can transfer seamlessly from working via a PSC to our exclusive umbrella solution. So, they can effectively meet the needs of each assignment and its associated working practices.

We can also provide an independent working practices review to support a decision on IR35 status.

Our dedicated team are on hand to support your contracting career and the benefits of joining Danbro’s employment umbrella are ample. We remove administrative burden and make sure you’re paid on time and in full; every time. You’ll be entitled to:

  • Full statutory employment rights
  • Online timesheet portal
  • BUPA Cash Plan*
  • Danbro One pension scheme
  • Public Liability, Professional Indemnity & Employers’ Liability insurance
  • Discounted Self-Assessment tax return
  • Access to our dedicated customer care team
  • No set-up costs and no exit costs
*Terms & Conditions Apply

So, if Danbro’s employment umbrella is right for you, click here to register online now. Our dedicated team of specialists will give you a free consultation, to help you find the most suitable option for your circumstances. Registration is swift, simple and stress-free and we can get you set up in a matter of minutes. For more information, contact our team today.

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