IR35, or the off-payroll working rules, is a piece of tax legislation that ensures that off-payroll and on-payroll workers are taxed fairly.
IR35, or the off-payroll working rules, ensures that off-payroll and on-payroll workers are taxed fairly. In other words, this legislation ensures that contractors pay the same Income Tax and National Insurance as an employee.
History of IR35
IR35 legislation was first introduced in 2000 through the Finance Act. Originally, IR35 status was determined by the contractor rather than the client. However, IR35 determination is no longer decided by the contractor as per the public sector IR35 reform of April 2017 and the private sector IR35 reform of April 2021.
Recent trends in IR35
IR35 Determination
IR35 rules, which prevent contractors from working as ‘“disguised employees’” by taxing them at a rate similar to employment, apply to individuals that do not meet HRMC’s definition of self-employment.
According to gov.uk, an individual is self-employed if most of the following statements are true:
- they put in bids or give quotes to get work
- they’re not under direct supervision when working
- they submit invoices for the work they’ve done
- they’re responsible for paying their own National Insurance and tax
- they do not get holiday or sick pay when they’re not working
- they operate under a contract (sometimes known as a ‘contract for services’ or ‘consultancy agreement’) that uses terms like ‘self-employed’, ‘consultant’ or an ‘independent contractor’
If it is determined that a worker is ‘“inside IR35,’” that individual does not meet HMRC’s definition of self-employment and is therefore considered an employee of the client and subject to pay the appropriate taxes. On the other hand, if it is determined that a worker is “‘outside IR35,”’ that individual meets the criteria for self-employment and is an independent contractor who will be paid gross for any work completed.
IR35 Reforms
In April 2017, it was determined that IR35 status in the public sector would be decided by the end-cclient rather than the contractor. This decision was mirrored shortly after in the private sector, after being delayed a year due to the pandemic, as the April 2021 reform deemed IR35 status the responsibility of the client. These reforms have had a significant impact on the industry, as the changes have caused many to earn less money due to the increase in taxes, which has caused some to return to permanent roles or even move overseas.
IR35 Trends in the Technology Sector
With the Great Resignation and subsequent skills shortages, the need for contractors is increasing – especially in the constantly expanding technology sector. However, the IR35 reforms have made it harder for many contractors financially – which has led many to reassess the viability of contract work. Some have chosen to use SThree’s Employed Contractor Model instead, through which we employ them but they retain the freedom and flexibility of a contractor.
Advantages of IR35
- Contractors that have secured a contract and deemed to be ‘inside IR35’within IR35 may be subject to additional benefits and protection, such as holiday, sickness, maternity benefits, and more, depending on the umbrella company.
- As contractors are still able to determine their IR35 status within smaller companies, start-ups and other businesses that are too small to be inside IR35 have become increasingly attractive to contractors.
Disadvantages of IR35
- IR35 reforms in both the public and private sector place the responsibility to correctly identify determine a contractor’s status in the hands of hiring departmentsthe end-client. As there are penalties for misidentifying a contractor’s status, many companies have applied ‘“blanket determinations.’ ” This means that all contractors will fall within IR35, which has caused many companies to lose contractors needed for urgent projectsand face potential financial penalties as it could be deemed in some cases that ‘reasonable care’ has not been taken to correctly identify the status of each contractor..
- Many companies stopped hiring contractors following the recent reforms as it was no longer viable for either party.
- Contractors that fall within IR35 have reported making less money while paying less taxes following the reforms, causing many to question the new system and ultimately return to permanent employment.