Everything you need to know about changes in IR35

Understanding IR35 is crucial for contractors, freelancers and employers.

Knowing how it works can save you some big bucks in terms of tax – so getting it right is essential.

What is IR35?

IR35 is an area of tax legislation designed to reduce tax avoidance through the use of Limited Companies and to tackle the issue of ‘Disguised Employment’ where a worker is engaged with a hirer through an intermediary rather than on a contract of employment. Application of IR35 is intended to identify legitimate contractors and ensure all parties are taxed appropriately. IR35 has been around since the year 2000, but there is an important change about to happen in 2021 which effects companies in the private sector.

What’s changing?

In April 2017, IR35 legislation changes were introduced into the Public sector, passing the determination of a workers’ IR35 status from the worker to the hiring company. As of April 2021, these changes will be mirrored in the Private sector.

Key points to consider

1. These changes only apply to hiring companies that meet two or more of the following
conditions:
• annual turnover of more than £10.2 million
• balance sheet total of more than £5.1 million
• more than 50 employees

If your company doesn’t meet two or more of these conditions, there is no further action to be taken by you, the hirer. In this circumstance the responsibility remains with the worker to determine their tax status. However, if your circumstances change in the future your requirement to determine workers tax status may need to be reconsidered.

2. These changes come into force on 6th April 2021 and will only be applicable to placements
continuing beyond 6th April or placements starting after 6th April.

What does it mean for you?

If your company does meet two of the above criteria and the placement in question commences on or after 6th April 2021 or continues past 6th April 2021, you will need to use HRMC’s tool known as CEST to determine the employment status of the placement.

The tool can be found here: https://www.gov.uk/guidance/check-employment-status-for-tax

Before you start the process with CEST, make sure you know the following information:
• the worker’s responsibilities
• who decides what work needs to be done
• who decides when, where and how the work is done
• how the worker will be paid
• if the engagement includes any benefits or reimbursement for expenses
What about current placements that will continue past 6th April 2021?

It would be advisable to get organised before the changes come into effect. Using the CEST tool you can determine the employment status of the placement at any time. The outcome of the assessment needs to be communicated to the worker and mustard, and we will amend the contract terms
accordingly.

How does this impact hiring now?

If the placement is likely to continue past 6th April 2021 the CEST assessment should be completed once the particulars of the vacancy have been verified; as this information should be included at the advertising stage. If the placement is likely to be shorter term, it is not essential to determine the employment status at this time. However, the assessment will need to be completed should the placement be extended.

The results of the CEST assessment

The CEST assessment tool will provide one of two results. The assignment will be determined as being inside the scope of IR35 legislation, or outside.
If the assignment is outside then the worker can opt to be paid though a Limited company and receive the tax benefits that this provides (e.g. being able to claim certain expenses as a deduction against taxable income)

If the assignment is deemed to be inside the scope of IR35, the worker will effectively be taxed as if they were a PAYE worker alongside your other employed staff.

There is a risk the worker may look for an increase in their pay rate where being re-assessed as inside when previously the had worked as a Limited company freelancer, to allow for the lower net income. There is also a risk that the worker may seek an alternative assignment outside of IR35.

What if the worker doesn’t agree with the CEST determination?

A worker may disagree with the employment status determination you reached.
If this happens head to the HMRC website https://www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-clients#disagree-decision for how to proceed.

Please note:

mustard is not a financial advice service. If you require further guidance contact HMRC and your tax advisor.