What IR35 contractors need to know about April 2021 changes
Changes to IR35 rules, introduced in April 2021, mean that medium and large sized private sector clients are now responsible for establishing the employment status of the contractors they hire. Previously, this arrangement only applied to public sector clients.
It’s a significant change to the Intermediaries Legislation – regulations intended to identify instances of ‘disguised employment.’ If you’re a contractor working with private sector clients, previously you would have decided your own employment status, so what else do you need to know about the April 2021 changes to IR35?
How do IR35 rules work?
If you’re deemed to be ‘inside’ IR35 it means you’re liable to pay income tax and National Insurance Contributions (NICs) on your earnings. The end-client also becomes liable for employer NICs.
This is a significant issue for both parties, as you become liable for more tax - your end-client also takes on considerable responsibility. When you work ‘outside’ IR35 regulations you pay less tax as a self-employed contractor working through a limited company. You can pay yourself a reduced salary, and top it up with dividends throughout the year.
When hiring a contractor, private sector end-clients need to determine employment status by looking at various factors, including the level of control you have over how and when you work, and whether you must complete the contract in person.
What are the implications of the IR35 changes in 2021?
Essentially, HMRC believes that if an individual is working in the same way as a client’s members of staff, they should be treated as an employee when it comes to paying tax. They want to close a loophole they believe has significantly reduced their tax receipts in recent years.
The new arrangements are concerning for contractors working with both public and private sector end-clients now. They carry serious implications for contractors and medium or large sized private sector firms, on whom hefty fines can be imposed by HMRC if they make an incorrect decision.
Smaller businesses are exempt from the IR35 rule change
Contractors also face the prospect of a significantly higher tax liability if they’re deemed to be inside IR35 rules by an end-client. Small private sector businesses are exempt from the rule changes, however, so what constitutes a ‘small’ business in this context?
Under the Companies Act, 2006, a small business must meet two or more of the following criteria:
- 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
It’s advisable to speak to your accountant if you’re concerned about the IR35 rule changes that have been introduced in 2021. They’ll be able to provide insightful advice based on the types of contract you undertake.
Handpicked Accountants can help you find a qualified accountant in your area if you don’t currently use professional accountancy services, or are looking to change. We have longstanding working relationships with fully qualified contractor accountants throughout the country. Please contact one of the team for more information.