IR35 is a set of tax rules that has been around for over twenty years. They were put in place to stop people paying less tax and National Insurance Contributions than they should.
The rules for IR35 changed at the start of the new tax year, on 6 April 2021.
But what is IR35, how has it changed and who is affected by the change? In this blog we’ll take a closer look at IR35 and answer these questions. We’ll also look at what happens if you find that you have inadvertently fallen foul of the rules and how insurance can protect you.
What is IR35?
IR35 is another name for the off-payroll working rules. The IR35 rules look at the way tax is paid for contractors. They are particularly focused on whether a contractor is genuinely self-employed or is instead what’s referred to as a “disguised employee”, someone who, to all intents and purposes, is employed by the business they are contracted to work for.
For the individual there are benefits of being a self-employed contractor. There are tax efficiencies associated with working through their own limited company, they control their work and have more flexibility.
There are also benefits for the company which uses contractors. There are no additional costs on top of the agreed fee, such as holidays and sick pay and no liability for National Insurance Contributions.
It’s a win, win for the individual contractor and the company employing them. But this is why these arrangements are scrutinised by the Inland Revenue. They recognise that in some instances both the individual contractor and the company using the contractor are trying to circumnavigate the rules.
What Changes Have Been Made to IR35?
Although the IR35 rules have been in place since 2000, some changes were made at the start of the current financial year on 6 April 2021.
Where the company is a large or medium sized business, responsibility for assessing whether the rules apply or not have moved from the contractor to the company they are providing services for.
This means the company must determine whether the contractor would be an employee if they didn’t have their own limited company through which they were contracted.
For small businesses, the responsibility of assessing their employment status still sits with the contractor.
If you are a contractor working for one business and want to check your status, read our guide on what constitutes self-employment.
Who is Affected by IR35?
Even though, in the case of large and medium sized businesses, responsibility has shifted from contractors to the companies using contractors, it’s worth contractors checking for themselves to find out whether they fall inside or outside IR35.
The rules apply to contractors who work for any public and private sector company that meets two or more conditions, which determine their size:
- their annual turnover is more than £10.2 million
- their balance sheet totals more than £5.1 million
- they have more than 50 employees
When a company undertakes an IR35 assessment they should give the contractor the reasons behind their decision in a Status Determination Statement. The contractor has the right to dispute the decision if they disagree with it.
What Happens if You Fall Foul of IR35 Rules?
The HMRC can investigate whether companies are tax-compliant, including the employment status of off-payroll workers.
If they find that a contractor is outside IR35 when they believe they should in fact be inside IR35, they will take action. They will issue a determination for the payment of unpaid PAYE tax and National Insurance Contributions, plus late payment fines and interest.
But this is not all. HMRC can also issue a penalty of up to 100% of the outstanding liability. If they deem that a company has been
uncooperative during the process and has not taken reasonable care when assessing off-payroll contractors, this penalty is likely to be severe.
How Can Legal Expenses Insurance Help?
Challenging an IR35 decision can be a lengthy and costly process, particularly if it ends up going to court.
This is where Legal Expenses insurance can help. If you have a valid claim, and provided you haven’t deliberately evaded the law, you can claim on your Legal Expenses policy to pay the costs of fighting a decision which you believe to be wrong.
Tapoly offer Legal Expenses insurance which cover this situation. If you have any questions or would like to discuss your options please contact our Tapoly team at email@example.com, call our help line on +44(0)2078460108 or try our chat on our website.