Hiring employees or contractors in the UK can be complicated — IR35 is a UK tax law that was introduced to prevent tax avoidance by contractors who work through limited or personal services companies. The law requires contractors who work similar to regular employees to pay the same income tax and National Insurance Contributions (NICs).
What is IR35?
IR35 is a UK tax law that was introduced to prevent tax avoidance by contractors who work through limited or personal services companies. The law requires contractors who work similar to regular employees to pay the same income tax and National Insurance Contributions (NICs).
Who Does it Affect?
The responsibility for determining the employment status of contractors under IR35 has shifted from the contractor to the employer under the latest updates to the law, which came into effect in April 2021. To determine whether a contract falls under the inside or outside category of IR35, it is important to understand the difference between a ‘contract of service’ and a ‘contract for service’. A contract of service is a contract between an employer and an employee, while a contract for service is a contract between a contractor and a client.
Small private businesses are exempt from the IR35 if they meet these conditions:
- Have an annual turnover of less than £10.1 million.
- Their gross assets amount to less than £5.1 million.
- Their workforce is smaller than 50 employees.
Any small business that doesn't meet these conditions is liable to the IR35 law.
New Updates to IR35
The latest IR35 changes came into effect in April 2021. These changes affect everyone across all industries. Employers have to watch out for two terms used in IR35: Inside and outside. When a contract belongs to the 'inside' category of IR35:
- Off-payroll working rules are enforced, and the law views the contractor as the client's employee for tax purposes.
- The fee-payer deducts income tax and NIC contributions from the money the contractor receives and pays NIC contributions for the employer.
- The fee payer is legally tasked with paying the contractor's company.
If a contract falls under the 'outside' category:
- A contractor is deemed a freelancer who runs a private business.
- The contractor can receive payment through an invoice without tax deductions and handles their company's taxes.
- The contractor does not use an intermediary.
Most importantly, the new changes shift the responsibility of determining employment status from employee to employer, making it harder for a contractor to dabble up as an employee and circumvent tax laws.
Differences between Employees and Contractors
Typically, permanent employees have a contract of service with their employer, where they offer their skillsets in exchange for payment. In contrast, a contractor has an agreement to provide services to their client or agency through their limited company.
These factors define employee status:
- The employer controls the employee’s tasks, and the employee must fulfill obligations outlined in their work contract.
- The employer determines where the employee works and for how many hours in a day.
- Employees cannot give their work to someone else.
- Employees enjoy various benefits from the employer.
In contrast, these factors define a contractor:
- Contractors should supply any services outlined in their contract with a company. The company holds very little say in how they work except determining the standard of work they want.
- Contractors should meet time limitations as they supply their services.
- Contractors shoulder any errors or defective work.
- Contractors receive payment according to defined rates and after an agreed period.
- They can contract a substitute to deliver the services.
The IR35 assesses whether contractors are actually employees when they work for clients. The IR35 law does not apply where the contract qualifies as a 'for services' contract.
How to be Sure Whether the New IR35 Laws Affect you or Not
To determine whether the new IR35 laws apply to you, it is important to consider your working arrangements, including the level of control you have over your work, your ability to substitute someone else to do your work, and the benefits you receive. If you are unsure about your employment status under IR35, it is advisable to seek professional advice.
Answering these three questions will help you determine if you're inside or outside the IR35 laws:
- Who controls, directs, or supervises how you work? You're likely an employee if your client has more say over how you work.
- Can you hire someone to handle work for you, or can you only do it yourself? If you can't substitute work, you're likely an employee.
- Is there a Mutuality of Obligation? In other words, do you have to accept work from your client? A supplier-client relationship where you have to accept it belongs to the 'inside' category of the IR35 law.
It's normal for contractors to want to fall outside the IR35. This way, you can choose assignments and work within the self-employment model. However, you should ensure you meet the criteria that qualify you as a contractor. Otherwise, you're liable to costly fines for unpaid taxes if the tests of employment prove you're an employee.
The best defense against falling on the wrong side of the IR35 law is understanding it and the penalties involved.
Remofirst is a certified Employer of Record (EOR) that specializes in global payroll and employment law compliance and helps hundreds of organizations hire in over 150 countries around the world. Schedule a demo with one of our experts today and start hiring globally tomorrow.