EDIT, April 2020: Due to the Coronavirus outbreak, IR35 has been pushed back to next year. We will keep this article updated as we learn more.
What is IR35 (Off-payroll working)?
IR35 is the abbreviation for the 'intermediaries legislation', a set of tax rules that apply to you if you work for a client through an intermediary – (a limited company or "personal service company" or as an independent contractor, which is how many people work).
If you fall into the legislation, you can expect to pay about 25% more in tax per year.
IR35 should not apply to you if you are a genuine independent contractor, freelancer, or consultant who has in their own business. To ensure this, you must take the time to understand how the legislation works, apply best practices to remove the risks and have a defense prepared in case of an investigation by HMRC.
The off-payroll working rules (IR35)
The off-payroll working rules can may if a worker performs their services through an intermediary. That will usually be the worker's own service company but can be a partnership, a managed service company, or an individual as well.
The rules ensure the workers, who would have been an employee if they were providing services directly to the client, pay broadly the same tax and National Insurance contributions as employees.
You may be affected by IR35 as:
- a client who receives services from a person through (their) intermediary
- a person who provides services through an intermediary
- an agency providing a person's services through an intermediary
If the rules above apply, tax and National Insurance contributions must be deducted from workers' fees and paid to HMRC.
When the rules of IR35 apply
IR35 rules take effect on 6 April 2020 and are applied differently. From this date onward, all public authorities and medium and large-sized clients will be responsible for deciding the employment status of all their workers.
The IR35 rules apply if a worker provides services to a client through an intermediary, but would be considered as an employee if they were contracted directly.
Use this employment status for tax service to help you decide if the IR35 rules apply to you.
Before 6 April 2020
If you are a worker contracted by a client in the private sector, it's your intermediary's responsibility (or your own) to decide your own employment status for each contract you have.
From 6 April 2020
If a worker provides services to a small client (in the private sector), the worker's intermediary (or themselves) will be responsible for the decision regarding the worker's employment status.
When you need to start applying the rules of IR35
Clients in the private sector
If you meet the conditions listed above, you must start applying the rules when the changes come into effect on 6 April 2020.
If you use the simplified test to determine your size, you must apply the rules from the start of the tax year following the end of the calendar year when you met the conditions.
If you do not use the simplified test and do not meet the conditions on 6 April 2020, your circumstances may change later. If you then meet the conditions for two consecutive years, the date you need to apply the rules will be different. You must apply the rules from the start of the tax year following the end of the filing period for the second financial year when you met the conditions.
What to do as a client
You will need to decide on the employment status of a worker for every contract you have with an agency or worker. You'll need to:
- pass your determination and the reasons for it to the worker and the person or organization you have a contract with
- keep detailed records of your employment status determinations, including the reasons for them and paid fees
- have a process in place for any disagreements that come up from your determination
If you are also the fee-payer and the off-payroll working rules apply, you will need to deduct and pay tax and National Insurance contributions to HMRC.
Small-sized clients in the private sector will not have to decide the employment status of their workers. This will remain the responsibility of the worker's intermediary.
