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Tax Law IR35 is coming soon. Does it apply to all UK businesses?


April 13, 2021

8 minutes of reading

Comments expressed by Businessmen the contributors are their own.


It is not surprising that HMRC in the UK is working to fine-tune agreements with independent contractors. With the lingering complexity and insecurity surrounding BREXIT, more and more UK-based businesses are turning to the backup workforce and prefer independent contractors to full-time employees. space.

However, there is a thin line between classifying a worker as an independent contractor rather than an employee, especially when it comes to hire a remote team. IR 35 is expected to unravel and come up with a series of clearer rules for businesses to follow.

Who is the IR35 independent contractor?

The IR35 is also known as the law of an intermediary. It was enacted in 2000. The law is designed to reduce the tax avoidance of freelance contractors, whom HMRC consider to be “disguised employees”.

To understand the code, you need to understand the difference between employees and independent contractors. In some cases, the backup workforce consists of full-time employees who are essentially working outside the employer’s premises, using equipment belonging to the employer and hours Their work or so-called “ time in and out ” is in accordance with the employer’s formal employee policies. However, instead of being paid, also known as Pay As You Earn, these workers bill their services through their limited companies. Needless to say, this approach increases tax efficiency for all parties to a work agreement.

The vast majority of single-trader limited liability companies operating in the UK rely on agreements involving independent contractors to keep them from providing employment benefits and reducing the tax burden.

To address this common problem, the IR35 is designed to ensure that independent contractors who provide their services through limited liability companies do the same job as full-time employees. hired by the same business, will be classified as employees and pay the same tax income and National Insurance contributions when those employees are paying as you earn them. HMRC inspectors may apply a case-by-case employment test based on work practice and the content of the work placement, rather than on contractual terms and acceptable language. used in the respective contracts signed between the parties. Simply put, stating that the service provider is an independent contractor is not enough to classify an agreement out of IR35.

Furthermore, in addition to proper workforce categorization, UK-based businesses need to address their backup workforce’s need for billing and payment.

Remote work arrangements are even more complicated because UK citizens and foreigners with full UK residence can work abroad due to Covid-19 in the UK. The increased administrative burden has prompted many HR managers to look for software solutions like UK-based companies. FMS converter That helps businesses fully automate the billing and payment for 184 countries, ensuring that both the independent contractor and their employers are in compliance with applicable laws. With the UK leaving the EU, most independent contractors are confused about whether they need to charge VAT, whether the invoices they issue are in compliance with tax laws, etc. is a summary of things to note.

IR35 rule

A contract can be ” inside IR35” or ” outside ‘IR35” depends on the arrangement. If a contract is considered ‘within IR35’, the employee will be classified as an employee and incur the same burden of National Insurance and income tax.

Conversely, if the contract is deemed to be ” outside of IR35 ”, then the worker is classified as an off-staff independent contractor.

Mutual obligations

Work as one self-employed Contractor imply that an employee may work on a project basis without any obligation to continue working for a client after the respective contract terminates.

At the same time, the client has no obligation to keep the offer contract when the current project is completed. One client and an independent contractor will fall “ within the IR35 contract ” if the customer is required to hand over the paid work to the contractor, the rate of pay is not directly related to the work actually delivered, no product and clear KPIs, independent contractors enjoy employment benefits such as paid sick leave and annual leave, using customer-supplied equipment, and customers having control over access and number hours that the contractor is independent of each job, etc.

There is another condition under IR35 that allows independent contractors to subcontract their work and work for multiple clients at the same time. That is to say, if an agreement states that the independent contractor has no right to subcontract or perform other clients, then the independent contractor will obviously be classified as an employee.

To replace

If a contract explicitly states that the independent contractor must be present throughout the project and work outside of the client’s premises, then this type of business relationship also follows the “within IR35″ rule spectrum. If an alternate worker can replace the previously designated independent contractor and assign the work specified in the contract, then that agreement is likely to be classified as ” out of IR35 ”.

Supervise, Direct, Control

Another condition that prevents a contract from falling within the IR35 is when the contractors have clearly demonstrated that they have control over the methodology applied to get work done.

On the other hand, if the client decides on the working models and controls how the project should be completed, then such a contract is most likely classified as ” within IR35 “and the worker will be classified as is an employee, not an independent contractor.

Equipment used

If the customer provides tools or equipment to complete the work under the contract and independent contractors only use the equipment to complete work for this particular customer and cannot use that equipment for delivery For other clients, the HMRC may view the arrangement as a “disguised employee” and insist on classifying the independent contractor as an employee. In most cases, pre-contractual clarification that independent contractors will use their own equipment and software licenses where possible, to complete the project will keep an external agreement. IR35 if all other requirements have been met.

Financial risk

Self-employed independent contractors are more likely to face a higher level of financial risk than an employee. Financial risks arise from the need to invest money in daily business operations. If the work assigned to the client appears to be substandard or defective, independent contractors often need to spend more time and invest more resources to address quality requirements at their own expense. .

Consequences of misclassifying IR35 bidders

If a contract falls within IR35 rules, then the independent contractor will be classified as an employee. In other words, the parties may be responsible for the payment of the unresolved additional income tax along with the National Insurance contributions.

Private sector employers that hire independent contractors will be responsible for determining their IR35 status. Since this is considered an administrative burden for many businesses, many SMEs prefer to outsource the task to specialized companies. out of payroll arrangements.

The HMRC may go back in time to determine if the IR35 applies to previous work performed by the independent contractor. In the event of a particular agreement classified within IR35, the HMRC may require payment of additional income tax and National Insurance contributions along with interest and penalties.

To save business owners from the financial consequences of misclassifying IR35 independent contractors, it is essential to run an IR35 test every time a new deal is negotiated.

Determining employment status is always a difficult decision for many businesses. However, there are a few simple ways to ensure that they comply with the IR35 rules:

Take the IR35 test

Find out if the arrangement is present ‘outside’ or ‘within’ the IR35. This can be done by taking Tested by HMRC IR35 to evaluate existing working methods.

Review existing methods

After the results of the HMRC test are available, you should undertake an assessment of existing working methods. It is important to see how the IR35 impacts the way a company does its day-to-day business operations. This analysis will help solve a wide range of potential problems.

Seek expert opinion

Before you make any modifications to the way you conduct your business, you should seek advice from legal experts. Make sure that the changes you are planning to make comply with IR35 and other relevant regulatory requirements. There are many sector-specific nuances and details that will be examined on a case-by-case basis.

The impact and benefits of the IR35 rules are yet to be seen in the private sector. However, getting familiar with the IR35 rules and their impact on the public sector can give your business many advantages.

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