March 30, 2021
The new IR35 reform will be launched at the start of the new tax year focusing on defining taxable relationships between clients and contractors.
The 2021/22 financial year begins on 6th April, bringing with it the new IR35 reform, known as ‘Intermediaries Legislation’, which identifies off-payroll working regulations. This change impacts thousands of businesses, their recruiters and potentially more than 1m contractors.
The basic understanding of IR35 is that it determines whether a contractor should be classed as an employee for tax purposes – however for contractors this can vary between clients and projects. The key factors HMRC will look to determine are:
Answering yes to these factors indicates a quasi-employment relationship however for more clarity HMRC has launched an online tool, CEST, to determine IR35.
Who is responsible?
The client is responsible for deciding if the service provided by the contractor is outside IR35 – in a self-employment capacity – or inside IR35 – in an employment capacity. When working with medium-large businesses, the contractor cannot decide their own IR35 status.
Who bears the cost?
In short – everyone. The cost difference can be huge for both contractors and their clients, with recruiters even bearing the cost of IR35 if they are involved in the relationship. Contractors can lose up to 25% of their income after tax, while businesses also incur costs associated with payroll.
The concern of being held responsible for incorrect IR35 decisions, the potential for costly fines, and the expectation of the workload required to determine IR35 status for each relationship, has resulted in some businesses refusing to work with contractors at all.
How can businesses safely work with contractors under new IR35 reform?
Imposing a blanket ban on contractor relationships or, conversely, deeming all contractors inside IR35 regardless of status are not the answer. Businesses need to be sure that they are taking the right steps to continue engaging in compliant relationships with contractors:
As long as businesses remain compliant and follow procedure outlined by HMRC to determine IR35 status and act appropriately, client and contractor relationships can continue to work harmoniously.