How does IR35 apply in the private sector?

Nov 29, 2022

IR35 reforms for the private sector were rolled out back in April 2021, but many contractors and businesses are still grappling with the changes.

Instead of all contracted workers self-reporting their employment status for tax purposes, the reforms put that responsibility into the hands of medium and large-sized businesses.

However, it has proven controversial. Many critics complain of confusing guidance and unfair judgements, and several legal disputes have been playing out in court since it came into effect.

If you’re carrying out freelance work as a sole trader or in a partnership, IR35 won’t affect you – but if you work through a limited company or another intermediary, you’ll need to get to grips with how the rules work.

What is IR35?

IR35 often referred to as “off-payroll rules”, became law via the Finance Act in 2000.

The rules clamped down on contractors who used limited companies to provide professional services while still enjoying the tax benefits of a corporate structure. The new legislation required these workers to pay a similar amount of tax compared to traditional employees.

At the time, workers themselves were responsible for applying the rules to see if they qualified as a self-employed freelancer (‘outside IR35’) or an employee (‘inside IR35’).

In 2017, reforms were introduced which made public sector organisations responsible for determining the employment status of contracted workers.

The same rule change was brought to the private sector in April 2021 for medium and large-sized businesses.

How does IR35 affect you?

If you’re a contractor who works through a limited company and you provide services to a medium or large business, your client will need to assess your contract based on a series of IR35 ‘tests’.

These include: 

    • Control – how much power your client has over when, how and where you do your work.
    • Substitution – whether or not a substitute could do the job in your place.
    • Mutuality of obligation – whether your client is obliged to provide you with consistent work, and whether you’re obliged to take it on.
    • Financial risk – how much risk you take on by doing the work.
    • Equipment: whether you can bring your own equipment to complete the work, or your client provides it for you.
    • Payment – whether you’re paid at a regular rate or by the job.
    • Exclusive service – whether you work for one client exclusively or multiple clients simultaneously.
    • Part & parcel – whether you’re treated as a part of the organisation in the same way employees are. For example, if you have access to facilities, meetings, social events and benefits.
  • Intention – what is the intention behind the working relationship between you and your client is – and whether you’ve both agreed that it’s self-employment?
  • Business on your own account – whether or not you operate in the same way as a genuine business.

The answers to these questions, alongside other tests, will indicate whether you’re an employee or self-employed in HMRC’s eyes.

If it turns out you’re considered ‘inside’ IR35, you’ll need to pay the same tax and National Insurance contributions a traditional employee would pay.

What do you need to do about IR35?

If your client hasn’t brought up IR35 yet, you might want to approach them to discuss where you stand.

Since the rules changed, there have been concerns about businesses applying ‘blanket assessments’ to contracts, labeling all contractors as within IR35 whether they fit the criteria or not. This is not allowed under current legislation, which requires businesses to take ‘reasonable care’ in their judgements.

If this happens to you, you may be able to show your client that your contract shouldn’t fall inside IR35.

You won’t be obliged to take any action if you’re working for a medium or large-sized client, as the responsibility lies with the business. Meanwhile, if you’re working for a smaller client, you’ll still be responsible for making the assessment yourself.

If you’re not sure where you stand, or want to make sure your contract doesn’t fall within the rules, get in touch for specialist IR35 guidance.

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