Time To Grow: what is IR35?

For businesses that employ contractors, IR35 may be the most dramatic legislative change to processing third-party payroll the UK has ever seen.

With IR35 seeing multiple delays, discussions and backlash, it’s quickly become quite a complicated topic, posing an issue for many business owners and workers.

In the third blog of our Time To Grow series, we’ve explored the changes and what implications they’ve had.

IR35 meaning

Introduced in April 2021, IR35, also known as off-payroll working rules, aims to rectify the tax processes between employer and contractor. 

As defined by HMRC, the legislation makes sure that contractors who would have been employees if providing their service directly to the employer pay broadly the same tax and National Insurance as an employee.

What did IR35 change?

IR35 now requires businesses that use contractors from a personal service company (PSC) or other similar arrangements to decide whether those workers are acting as a supplier or employee.

If a worker’s contract is outside the legislation, then they are seen as a genuine contractor and will be paid their fees accordingly.

Use the Government tool here to determine if a worker is acting as a contractor or employee.

Why was IR35 introduced?

The legislation aims to resolve significant issues regarding non-compliance with tax.

Previously, the responsibility to determine whether someone was acting as an employee fell on the contractor.

But HMRC estimates that fewer than 10% of PSCs complied, and the annual tax cost of this non-compliance could have been as much as £1.3bn by 2023/24.

Why was IR35 delayed?

Originally due to come into play in April 2020, The Chief Secretary to the Treasury, Steve Barclay, announced that IR35 was postponed a year due to the disruption caused by the COVID-19 pandemic.

Who determines a worker’s IR35 status?

Following the April reforms, businesses receiving a contractor’s services – the ‘client’ – determine whether a contract falls within IR35, not the contractor.

Once a business makes its decision, it must:

• Inform the party they are engaging with (the agency or umbrella company) and the worker of their decision as to whether the rules apply, the status and their reasoning
• If a labour supply chain is involved, the decision must be passed down each stage of the chain

How do I know if IR35 applies to me?

Contractors via limited companies

IR35 affects contractors that provide their services to clients via an intermediary, typically their own limited company or personal services company.

Businesses

For IR35 to apply to your business, you must meet two or more of the following criteria:

• Annual turnover greater than £10.2 million
• Balance sheet total greater than £5.1 million
• Employ more than 50 people

If IR35 applies to your business, you need to process contractors classified as employees through your payroll for tax and National Insurance contributions (NICs).

Does IR35 apply to small businesses?

Small businesses that don’t meet the above criteria are exempt.

If a contractor works for a small client, their intermediary (usually their PSC) will still be responsible for working out their employment status.

If asked, a small business must confirm its size to the agency or fee-payer.

How does IR35 work if you’re self-employed?

If you’re classified as self-employed, it won’t apply to you as you’re operating without a limited company.

How is IR35 assessed?

To assess a contractor’s working relationship, HMRC conducts ‘tests of employment’ in accordance with UK employment law.

Instead of looking at a written contract between the worker and business, an inspector examines the true nature of the working relationship.

Findings are then presented to a judge who provides their final verdict on whether IR35 applies.

Watch our payroll webinar with CIPP

To find out more, check out our complimentary payroll webinar with Lora Murphy, Policy & Research Officer at the Chartered Institute of Payroll Professionals (CIPP).

Watch the webinar here.

Time To Grow

For a limited time, we’re offering businesses up to 50% off all IRIS software so you can optimise your processes and refocus your time on critical activity – find out more here.

* IR35 rules can be complicated, so please only treat this blog as a guide and speak to a professional advisor or consult HMRC guidance for expert advice.