Please note – The concept of IR35 status for tax and national insurance is not changing, but how the IR35 status determination decision is made and how the rules applicable to that status are then applied is changing.
IR35 is a piece of UK tax legislation first introduced in 2000. It was designed to collect employment status income tax and national insurance from contractors and consultants who have set up their own limited company or personal service company. Working via a personal services company can enable contractors to be taxed as a business rather than as an employee: IR35 aims to identify those personal services company contractors, who, were it not for the existence of their own limited company would be more like an employee of the end client. These contractors will be taxed as an employee rather than as a business. This is termed as being inside of IR35. This change comes into effect on the 6th April 2021.
Previously, for contractors working through their personal services company, the person who determined whether a contract was either inside or outside of IR35 was the contractor themselves. However, from 6th April 2021, this will be the responsibility of the end client. The client needs to reach a status determination by reviewing the day-to-day working practices of each of their contractors and deciding whether each contractor is outside or inside of IR35.
If a contractor is working like an employee of the end client, the client could determine that the contractor is inside of IR35. If the contractor is working like an independent consultant, the client could determine the contractor is outside of IR35. If the status determination is that the contractor is working inside of IR35, the fee payer, which is the entity that pays the contractor's personal service company must deduct employment status income tax and national insurance as if the contractor was an employee.
For the past 20 years, contractors who work through their own personal services company decided whether they were working inside or outside of IR35. If the contractor determined they were working outside of IR35, they would be taxed as a business through their personal services company rather than taxed like an employee. However, from 6th April 2021, the responsibility for determining IR35 status moves to the client. The client must review your day-to-day working practices to reach a status determination. If the client determines that you are working more like an employee, you could be inside of IR35. If the client determines you are working more like an independent consultant, you could be outside of IR35.
This status determination must be passed to all other entities in the contract chain including you, any recruitment business and any entity who pays fees to your personal service company. If the client determines you are working inside of IR35, the fee payer must deduct employment status income tax and national insurance before your personal service company is paid. This means you will be paid NET of income tax and national insurance.
On 27th February 2020 the Government released new guidance notes on IR35. The guidance notes state that contractors operating through their own personal services company, who are working for International clients that are wholly outside of the UK, are not in scope for the off-payroll revisions.
From 6th April 2021, the responsibility for determining whether a contractor is either inside or outside of IR35 rests with the client. The client must review each contractor’s way of working and determine whether they are inside or outside of IR35.
Case law since 2000 suggests considering some of the following ways of working when reaching a status determination. To be determined outside of IR35, the following may apply:
- There is no obligation for the client to offer and no obligation for the contractor to accept work on an ongoing basis. This is called the mutuality of obligation test.
- The contractor is not under the supervision or control of the client. The contractor is able to determine when, how and where they work.
- The contractor has an unfettered right of substitution. There is no indication that the contractor is required to personally provide their services.
- The contractor is paid on completion of tasks, projects or milestones. The contractor is not entitled to any overtime or any other benefits.
For an inside of IR35 determination, the following may apply:
- The client directs and supervises the work of the contractor.
- Substitution of the contractor requires express consent of the client.
- There is an obligation on the client to pay fees for all hours or days worked.
- The contractor has no financial risk when performing services. They are paid every hour or day worked, regardless of any problems.
Are you a Contractor? Download our Contractor's Guide and read more about the next steps regarding IR35.
Are you an Employer? Download our Client's Guide and discover the next steps to staying compliant.
Download our Status Determination Statement.
Download our Small Company Exemption Declaration.
Download our Overseas Client Declaration.