If you use contractors, you’ve probably heard of IR35. It has always been a confusing piece of legislation, and recent changes have only added to the uncertainty.

IR35 mistakes can prove costly, so here is our guide to the updated law and what it means for you. 

What is IR35?

IR35 is a set of laws designed to prevent tax avoidance by contractors. Also known as the “off-payroll rules”, it applies to any worker hired through an intermediary. 

This can be a personal service company or a third party. IR35 requires these contractors to pay the same tax and national insurance contributions as an employee who has been hired directly if they are found to be a ‘disguised employee’.

A disguised employee is someone who contracts out their work but is essentially treated like an employee. That means they get all the benefits of regular employment, but pay less tax than someone on the payroll. This is what the Government and IR35

IR35 dates back to 2000, but the original legislation was widely criticised. It was eventually replaced in 2017 by a new set of laws. 

These have been rolled out gradually over the last few years, with the final stage coming into effect in April 2021. 

What has changed? 

It used to be up to contractors to determine their own IR35 status. The new version of IR35 shifts the responsibility to the employer. 

This change was introduced in the public sector in 2017, and was only extended to private companies in April 2021. 

IR35 now applies to any medium or large business that uses contractors. A company is considered medium or large if it meets two or more of the following criteria:

  • an annual turnover of £10.2 million or more
  • a total balance sheet of £5.1 million or more
  • 50 or more employees.

If you fall into this category, you will need to determine the IR35 status of every contractor you hire. This decision should be made before the job begins, and communicated to the contractor in advance. 

If you run a smaller business, it is still up to the contractor or intermediary to determine their own IR35 status.

Who does IR35 apply to?

HMRC uses three main criteria to judge whether a job falls under IR35:

  • The employer must have a certain degree of control. IR35 is less likely to apply if the contractor is free to decide when and how the job is carried out.
  • The contractor should be personally responsible for carrying out the work, rather than having the option to send someone in their place.
  • There should be a mutual obligation between the employer and the contractor. This means that you are expected to provide work and the contractor is expected to complete it. 

Remember that IR35 is judged on a job-by-job basis. This means that you may have to assess the same contractor multiple times, and IR35 may only apply to some of their contracts. 

What happens if I get it wrong?

HMRC promised to waive IR35 penalties for the first year in the case of “accidental inaccuracies”. 

This grace period has now passed, so an error could prove costly. Although the harshest penalties are reserved for deliberate errors, careless mistakes can still incur a penalty of up to 30% on top of any tax you owe. 

What steps can I take to protect myself?

The important thing is not to panic. In the early days of IR35, there were stories of companies sacking regular contractors to avoid getting in trouble. 

As long as you take appropriate care, there is no reason you can’t keep using the same contractors as always, supposing the economics of it still add up for you. 

Be vigilant about assessing the IR35 status of every contractor if the new changes apply to your company. 

Remember that the same contractor may have a different IR35 status depending on the job they are carrying out. Even if a contractor assures you that a job falls outside IR35, it is your responsibility to make sure. 

IR35 is a complicated area of employment law, and you’d be forgiven for feeling a bit overwhelmed. If you’re unsure of anything, don’t hesitate to get in touch.