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Who does the IR35 Private Sector Reform impact and how?

The IR35 reform in the private sector came into force on 6th April 2021, as we enter the new tax year, having been delayed by one year due to the Coronavirus pandemic. Following numerous technical references to IR35 in mainstream media and the way it will create a shift in the way selected contractors operate, Jon Munnery of UK Liquidators, translates the reform into laymen terms.

The IR35 reform continues to divide industry professional bodies and contractors following a series of IR35 tribunal losses for HMRC, speculation around the accuracy of HMRC’s CEST tool (Check Employment Status) and a lack of rights available to contractors.

What is IR35?

IR35 is also known as ‘intermediaries’ legislation’, or ‘off-payroll working rules’, formally introduced under the Finance Act in April 2000. The primary aim of the measure is to tackle ‘disguised employment’, which is when an individual exploits contractor status to take advantage of the tax implications, where in reality – they should be classed as an employee and taxed accordingly.

IR35 tax legislation impacts contractors and selected employers will now have a shared responsibility in determining tax status following the April 2021 reform. The public sector reform already took place in April 2017, changing the way employment status is determined for contractors working for a public authority.

What is the IR35 Reform?

The IR35 private sector reform changes the way contractors interact with medium to large private sector clients. Before the reform, contractors working on a private sector contract were responsible for determining their own tax status.

Following the reform, the onus will now lie on the private sector body to determine the IR35 status of the contractor, providing they are a medium to large business. A medium business is made up of over 50 employees and generates turnover of over £10m, or this can be easily determined by whether the business requires an audit.

If the contractor is found to be caught by IR35, they will be subject to similar tax treatment to that of an employee, and therefore required to pay Income Tax and National Insurance Contributions.

Although tax status should remain the same, regardless of the party arriving at the result, in reality – a different tax determination could significantly reduce the take-home-pay of the contractor. A contractor caught under IR35 is likely to face a pay reduction of up to 25%, which could force them to switch operating structures to maximise take-home pay.

As a contractor engaging with a private sector (medium-to-large) business, you will need to seek an employment status determination, including the reasoning behind this.

How is IR35 status determined?

There are core factors that differentiate a contractor from an employee, such as control and fulfilling obligations.

  • Control & Direction: Do you have the control to determine your working style, or does the client control how and when you complete the work

  • Mutuality of Obligation: Are you obliged to carry out the work offered, or are you able to refuse?

  • Right to Substitution: Are you able to send someone as a replacement if you are unable to carry out the work?

In addition to these three factors, you will need to be aware of numerous working conditions, such as employee benefits, termination terms, and equipment ownership.

How will the IR35 private sector reform inform employers?

If you are a private sector, medium or large business and you engage with contractors, you will be obliged to determine the tax status of the contractor. As the hiring body, the responsibility for status determination lies with you. It is evident end parties have been conducting blanket decisions to err on the side of caution, however, this is unlawful. IR35 law states that each contract must be individually tested for IR35 status.

As the reform comes into play, both contractors and employers need to tread carefully as HMRC enforces the new measure. It is also vital to note that the tax status of a contractor can vary for each contract, so if you are working on multiple contracts, you could be inside IR35 for one job, and outside IR35 for another.

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John O'Donnell
Business Finance Manager
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