Hiring employees or contractors in the UK can be complicated — the United Kingdom has introduced laws aimed at preventing tax avoidance, which means companies are at higher risk of misclassifying employees.
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).
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:
Any small business that doesn't meet these conditions is liable to the IR35 law.
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:
If a contract falls under the 'outside' category:
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.
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:
In contrast, these factors define a contractor:
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.
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:
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.
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