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The IR35 changes are due to come into force in April 2021 at the start of the new tax year. They were delayed by a year as a result of COVID-19. They might affect you if you’re a self-employed contractor.
IR35 is a regulation that was first introduced in 1999. It aims to prevent people from avoiding paying the correct amount of tax by acting as disguised employees.
A disguised employee is someone who is an employee in everything but name – and describes themselves as a contractor. They often work under an umbrella company (like an agency) but work long term for a single business, rather than for multiple different clients. They work 9-5, they are not replaceable (i.e. their job is theirs specifically and cannot be done by a freelancer if they’re not available), and their day-to-day is controlled by the ‘client’.
There are two main benefits: one for the contractor, one for the client.
Contractor – is paid like a freelancer but benefits from the structure and relative security of being a permanent worker.
Client – can evade making National Insurance Contributions for benefits such as holiday pay, sickness pay and pensions.
There are three considerations to factor in when you’re thinking about your employment status.
Who controls the work you do, when you work, where you work and how you work? If it’s you in the driving seat, you’re a contractor. If it’s your workplace, you’re an employee.
Can you be replaced or does your role rely on you specifically carrying it out? If it’s you and only you, you’re an employee.
How obligated are you to say yes to the work that your client provides? And how obligated are they to provide you with work? Only true contractors have the freedom to say no to work, and do not expect to be given work by a client.
This has been in place since 2017 for those working in the public sector. But from next year, the private sector will be obligated to fall in line as well. HMRC estimates to have lost £1.3 billion every year as a result of people evading their tax liabilities because of their employment status.
Whether you fall within IR35 because of deliberate evasion or whether you had no idea, the impact will be the same. And that’s a scary prospect for many.
As a contractor, you could lose out on as much as 25% of your income. And to make matters worse, HMRC can go back into your record up to 6 years. That means you could additionally owe money for past discrepancies.
In February 2020, the UK government made a few tweaks to the off-payroll rules. They’re due to come into effect in 2021: