IR35 reforms in the private sector are due to come into effect in April 2021. As a contractor, this could have a significant impact on you, your working practices, and your take-home pay. You need to understand what IR35 is and how your IR35 status will be determined to ensure you’re working compliantly.
What is IR35?
IR35 is a legislation which was introduced to prevent contractors from avoiding tax by working as ‘disguised employees’. According to HMRC, a ‘disguised employee’ is a contractor who is supplying their services to clients through a Limited Company, when in practice they should be classed as an employee. Typically, contractors will act as ‘disguised employees’ because it enables them to avoid paying the correct taxes – saving them money.
Under the current IR35 regulations, you, the contractor, must assess your own contracts to determine your IR35 status and ensure you are working compliantly and paying the correct taxes. The IR35 rules apply on a contract-by-contract basis, meaning your IR35 status can vary between contracts. While some assignments may fall into the ‘inside’ IR35 category, others may be classed as ‘outside’ IR35.
What does an ‘inside’ IR35 status mean?
If your contract is deemed to be ‘inside’ IR35, this means that you are behaving more like an employee than someone self-employed. If this is the case, you will have two options. You can continue to operate through your Limited Company if you’d like, but you would be paid a net amount after tax and other employment costs are deducted from your gross pay – meaning you won’t enjoy the usual tax benefits of working this way.
Or you may need to find an alternative working option, such as contracting through an Umbrella Company, like Crest Plus Umbrella.
What does an ‘outside’ IR35 status mean?
If your contract is deemed to be ‘outside’ IR35, this means that your contracts and working practices reflect that you are legitimately self-employed. If this is the case, you would, in theory, be able to continue working through your Limited Company and enjoy the tax efficiencies this offers.
In April 2021, HMRC will be implementing changes to the IR35 regulations. They will mean that the liability for determining your IR35 status (‘inside’ or ‘outside’ IR35), will no longer be your responsibility. This responsibility will now switch your end hirer.
Note: The rules will only apply where your end client is a large business in the private sector.
How is this determined?
In the lead up to April, your end hirer will assess your IR35 status to issue you with what is known as a Status Determination Statement. This will provide you with details of your IR35 status (whether you are operating ‘inside’ or ‘outside’ IR35) and how this conclusion was reached. There are a variety of factors which your end hirer should consider before determining your status, including the contracts in the supply chain and your actual working practices.
Our IR35 experts can help you understand more about how IR35 will impact you and, if you require, we can assess your contracts ahead of the reforms so you can be clear on your working options and have peace of mind you’re working compliantly. Get in touch with us to find out more – we’ll be happy to help.