IR35: A simple guide
April 2021 is bringing significant changes to the off-payroll working rules (more commonly referred to as IR35) in the private sector. Responsibility for IR35 status determination will switch from contractors to end hirers, with recruitment agencies facing liability for any unpaid tax. It is vital that you to start planning now to ensure that you are prepared for these changes.
Who are i4?We are an umbrella payroll provider. We have been established since March 2005 making us one of the UK's longest serving providers giving us a wealth of experience in tax and employment legislation, which we can utilise in assisting you. So you can trust that you are in safe hands and we are here to protect you, our employee.
Who is affected by IR35?Firstly, regarding the IR35 private sector reforms, these reforms only affect Limited Companies. Not umbrella companies, PAYE workers or self-employed individuals, so if you do not have a Limited Company you have nothing to worry about. If you do currently have a Limited Company or Personal Service Company (PSC) then it is important you understand what is changing.
What is changing in April?In the period pre-April 2021, it is down to you, the contractor, to decide if the IR35 rules apply to your contract and as a result how much tax and national insurance contributions you need to deduct and pay each time your business bank account receives payment. If you decide that the rules don’t apply or you are "outside" IR35 then you can pay very little tax and national insurance. As a result, HMRC estimates that 90% of contractors do not correctly apply the rules and have estimated this is costing the UK approximately £1.3 billion, so you can see why HMRC has decided to act. From April 2021 onwards HMRC has decided to make the end client (not the recruitment agency) responsible for deciding if IR35 rules apply or not. In other words the actual place of work will confirm if you are inside or outside IR35. The recruitment agency, if you are using one, will have no say in deciding if the rules apply. Furthermore the risk and responsibility to pay the correct tax and national insurance contributions across to HMRC will no longer be that of the contractors. It will be that of the "fee payer" or the entity paying into the business bank account of the limited company. That will normally be the recruitment agency, if you do not use a recruitment agency it will most likely be the end client. So let's recap.
- HMRC say that the end-client has to determine if the rules apply.
- The fee-payer has the risk to get the tax and national insurance deducted correctly.
Will I be Inside or Outside IR35?As a result of the subtle changes it is extremely unlikely the supply chain will conclude you are outside IR35. HMRC have stated though that the end client should use their CEST tool to determine if the rules apply or not and doesn't advise on making sweeping assessments. Once the end-client determines if you are in or outside IR35 this must be relayed to you and your agency (if you’re using one) via a "Status Determination Statement" (SDS). Furthermore, the end-client must take "reasonable care", in deciding your employment status. The agency/fee-payer is bound by the decision of the end client. If you are inside IR35 then your net pay will be broadly the same as an employee. If the end-client confirms you are outside IR35 then it is business as usual and you can be paid gross pay it into your Limited Company bank account and you will be responsible for deducting tax and national insurance contributions.
Is there anyway around the rules?There is one exception to all of this, and that is if you work with a "small company" as defined in the Companies Act (2006). A "small company" must meet two of the following criteria to be deemed a small company for IR35 purposes.
- Employ less than 50 people
- A balance sheet of less than £5.1 million
- A turnover of less than £10.2 million.
How can I get paid from April 2021?So assuming from April 2021 you are working for a medium or large company and you are inside IR35 what are your options?
- Your most flexible option is probably to join an umbrella company
- You can be paid net pay into a Limited Company if your agency/end-client wants to take the risk and administrative burden of doing this
- Your recruitment agency can pay you PAYE if they have this internal payroll function available
- You can seek permanent employment
What is the benefit of joining an Umbrella Company?Out of the four options available the umbrella model will give you the most flexibility whilst giving you all of your employment rights and it still allows you to retain your Limited Company rate of pay i.e. your net pay should be more through an umbrella company than anything else.
What should I avoid?Just a word of warning, do not partner with loan schemes or enhanced umbrella schemes that guarantee a certain percentage net pay often around the 84% mark. These are usually tax avoidance models and the punishments for engaging with such models are exceptionally harsh.
How do I register with i4?If you would like to register with a compliant umbrella service the easiest way to do so is via our website or by calling the sales team directly on (020) 3603 1290. Registration is free and takes no longer than five minutes.