IR35 legislation changes April 2021
IR35 is legislation introduced to prevent disguised employment, what this means is that HMRC is not going to allow contractors using a limited company for the purpose of tax relief when they are actually considered to be employees.
In most cases, individuals tend to fall outside IR35 rather than inside IR35.
Inside IR35 is defined as a contractor caught within the remit of legislation, therefore, classed underemployment
Outside IR35 means a contractor is in reality independent (not recognised as an employee) on the basis; an individual or multiple directors are running their business with multiple clients, are able to send substitutes to complete the work, and are not controlled in any way.
Medium and large size companies are now liable to carry out the determination test to establish each contractor’s employment status if they fall inside or outside IR35. This in essence means that if the determination test is not carried out correctly, HMRC will hold companies liable for the income tax and national insurance. Determination can be challenged via an appeal process.
Small companies will be exempt from the legislation change, as a result, contractors will be responsible for deciding their own IR35 status. These changes have already been implemented since April 2017 within the public sector.
From April 2021 clients will be held responsible for determining IR35 status. If a contractor’s status is considered as ‘inside IR35’ the client will be liable to ensure income tax and employee national insurance is deducted via a PAYE scheme either by the client or outsourced to an umbrella company. If a contractor’s status is considered ‘outside IR35’ they can continue operating as a limited company without any PAYE deductions.
If the client’s determination test is considered ‘inside IR35’, our recommendation is to find an alternative client even if the new client’s determination test is considered ‘inside IR35’. Offering the same services when considered ‘inside IR35’ by the client may result in HMRC Investigations. This has been seen from previous investigations for workers within the public sector. Why? The responsibility of determining the status was upon the contractor before this legislation change.
If the services offered as a company were substantially different in comparison to the determination test of ‘inside IR35’, then there is no issue in continuing with the same client underemployment. Nevertheless, it is imperative for evidence to be documented to prove the difference as this would automatically be a red flag for HMRC.
If IR35 affects you, feel free to get in touch. We have a team of experts available here to support you should you require an independent IR35 review to establish your status. Call us today on 0116 473 7227.