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IR35: What You Need to Know

Understanding and complying to employment legislation is crucial to business success and growth, which is why any updates and amendments from the government are often met with trepidation. Most recently, the appointment of Liz Truss as Prime Minister has put IR35 rules in the spotlight.

Earlier this year, Truss vowed to improve the current IR35 off-payroll working rules as a way of supporting the UK economy, one of several incentives that were deemed ‘now more crucial than ever’ in the wake of the difficulties caused by Brexit, Covid-19, and an unsettled government.

What is IR35 and Who Does it Affect?

Initially introduced in April 2000, the IR35 legislation was designed to deal with tax avoidance, with IR standing for Inland Revenue and 35 referring to the press release issue number. There have been further revisions, most recently in April 2021, which stated that public authorities and medium and large-sized businesses outside the public sector were responsible for applying IR35 rules to workers.

The rules are designed to correctly identify whether someone is working for a business (referred to in the legislation as the ‘client’) as an employee or as a contractor/freelancer. In terms of tax, the rules identify whether the client or the contractor/freelancer is responsible for taxing their income.

Understanding IR35 as a Freelancer or Contractor

Defining contract and freelance roles can be difficult, and unfortunately, some individuals have used the terms in order to receive income without paying taxes. The IR35 rules aim to avoid this, but what does it mean for legitimate contractors and freelancers? Namely, knowing whether the work you do and how you are paid classifies you as a ‘deemed employee’ and subject to employment taxes

The guidelines use two terms to refer to the difference. ‘Outside IR35’ means you are considered self-employed, can use the term contractor/freelancer, and are responsible for your taxes. ‘Inside IR35’ means you are technically an employee, and the company should tax your income. 

Understanding IR35 as a Business

If you as a business discover that a contactor/freelancer falls under the ‘inside IR35’ rules, you must pay the relevant taxes just as you would for an employee, including deducting National Insurance Contributions (NICs) and income taxes as well as employer NICs and an Apprenticeship Levy. Details of the IR35 rules for businesses (termed as ‘fee payers’) can be found on the GOV.UK website.

The Future of IR35

The IR35 Reforms will no longer apply from April 2023, according to new information. This means that the original rules will still remain, and contractors will be responsible for assessing their own tax after the repeal. This is an attempt to remove systemic issues such as contractor bans and non-compliant blanket IR35 determinations. The repeal itself cannot go ahead until it has passed the drafting of the next Finance Bill. Dave Chaplin, CEO of IR35 Shield, tells businesses to “carry on as normal, but have a transition plan ready.”

Further Support with IR35

For both employee and employers concerned about IR35, there is an online ‘Check Employment Status for Tax’ service that can be helpful for deciding whether the off-payroll working rules apply. And with the promise of a review to come soon, future guidelines should prove more effective.

As specialist recruiters, Morris Sinclair aims to support both employers and employees in finding the best working partnerships within the IT and technology sector. Whether you are looking for a new team member or the next step in your career, we’re here to help.

Contact us to find out more.

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