IR35 for dummies: the what’s, why’s and who’s to keep you safe from HMRC
IR35 – even the name is vague and uninteresting. But unfortunately, this IR35 guide for dummies will only help you begin to understand the tax legislation. You will probably have to carry on learning about it for years to come, as it changes and develops with the world of work.
As a rule, it’s a good idea for employers and contractors to have a general understanding of IR35 before the new rules come into play in April.
So, what is IR35?
IR35, known as off-payroll working, is tax legislation that’s being updated on the 6th April 2021.
Its purpose is to tackle tax avoidance from:
- Businesses that are designating their workers as disguised employees.
- Contractors that are designating themselves as disguised employees.
- Businesses that list workers as self-employed to disguise their true employment status.
But this isn’t just about paying the taxman. IR35 also helps disguised employees claim their rightful benefits – like sick pay and maternity leave – which they don’t receive when they’re listed as self-employed.
This legislation shouldn’t change your workings too much if you employ freelancers or contractors on a project-to-project basis, but if you’re employing them for the long-term, it could make a big difference.
Who these rules apply to
Previously IR35 only applied to public sector organisations, but now private sector businesses and charities have to comply. But if you’re a small-business owner, you might be in luck.
You have to meet at least 2 of the following 3 criteria to have these rules apply:
- Your organisation has an annual turnover of at least £10.2 million.
- You have a balance sheet of at least £5.1 million.
- You have more than 50 employees.
If you meet 2/3 of these criteria, you’ll need to start working in accordance to new IR35 rules by the 6th April 2021.
If you don’t, the responsibility of determining the IR35 status doesn’t fall on you, but an intermediary. So if you hire contractors through another organisation, you can rely on them to determining whether their workers fall inside or outside IR35.
For example, if you hire an intern or junior through DigitalGrads, we will handle IR35, payroll, contracts, tax and NIC for you through our temporary employment scheme. So essentially you’ll be able to employ talent off your own payroll and on ours!
Working inside IR35
When your workers are designated as working inside IR35, they’re entitled to benefits. These include national minimum wage, leave allowances and pay entitlements.
If you’re currently working with contractors or freelancers that don’t receive these benefits, no need to panic. It’s important that you assess whether these workers will fall inside or outside IR35 by April.
If your worker:
- Is working for you as their only client for a long-term basis.
- Doesn’t have their own business identity.
- Is basically a contracted employee.
They may need to work inside IR35 in the future.
And if they:
- Are working as a typical freelancer, project-to-project.
- Have their own equipment, premises and other clients.
They may be designated outside IR35.
If you have any questions or concerns about IR35, it’s worth talking to a financial advisor or tex expert. You don’t want to be on the receiving end of a HMRC enquiry!
Realistically, the chances of being investigated by HMRC are low, but better safe than paying retrospective tax, NIC and extra fees.
I hope this IR35 guide for dummies helps you gain a clearer understanding of the tax legislation.
If you need any more hiring help, be sure to ask the experts at DigitalGrads.