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We’ve had a lot of clients asking us about IR35 recently, especially what the new rules will mean for their business. This is no surprise, as IR35 has been a talking point for a long time and its reform was significantly delayed due to the coronavirus pandemic. 
 
If your business operates in the private sector, we’ve put together all of the key information you need to know about IR35 and how it works. 

What is IR35? 

Sometimes tax legislation has a self-explanatory name and on other occasions it really doesn’t. IR35 is an example of the latter, as it doesn’t give any clue as to what it’s related to. 
 
To clear things up, IR35 refers to the off-payroll working rules. It was first introduced in 2000 to enable HMRC to determine whether a contractor truly is a contractor, as opposed to an employee in disguise. 

Why does IR35 exist? 

IR35 was launched in response to contractors who were working as if they were self-employed even though they were actually employed by their own limited company. This enabled them to (wrongly) benefit from far greater tax efficiency and reduced bills from HMRC. 
 
However, this is a form of tax avoidance and deemed illegal, so HMRC introduced IR35 as a means of stopping it from happening. Unfortunately, the system has always been difficult to understand and fraud still occurs, which is why new rules are now in place to simplify the process. 

How does IR35 work? 

To put it as simply as possible, IR35 tests your employment status. As such, it clearly shows whether a contractor should be working as an employee or a self-employed individual. 
 
If you’re an employee and qualify as IR35, there will be income tax and National Insurance contributions applied to your account by HMRC. If you’re outside of IR35 due to being legitimately self-employed for the work delivered, you have less tax to pay. 

How are the IR35 rules changing? 

Following a year of delays due to the pandemic, April 2021 sees the changes to IR35 finally coming into effect: 
It’s now the responsibility of medium and large businesses to ascertain the contractor’s employment status. 
The contractor should then be informed of the decision through an official Status Determination Statement, which they have the right to dispute. 
In the case of small businesses, it remains the contractor’s duty to work out their own employment status. 

What qualifies as a small business? 

To make the system foolproof, HMRC says that end clients qualify as small businesses if they meet at least two of the following criteria for two consecutive financial years: 
An annual turnover of no more than £10.2 million 
A balance sheet total of no more than £5.1 million 
No more than 50 employees 

We’re here to help with IR35 

Whilst the explanation above covers the majority of what you need to know, there may be specific situations and circumstances that make the new IR35 rules difficult for you to navigate. We recommend getting in touch with our tax specialists to ensure that your business remains compliant. Fill in our contact form and we’ll get back to you right away with tailored advice. 
 
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