Legislation surrounding payroll tax can be complicated as legislation is ever-evolving. It’s important to make sure that you are working in line with the relevant parameters outlined by HMRC, as new changes are due to come into play on April 6th 2021. Here we break down what IR35 is, what it means for you as an agency or a contractor and why it’s so important ahead of the April 2021 changes.
What is IR35?
IR35 is legislation relevant to limited company contractors. It’s important to make sure that if you are working ‘inside the scope of IR35’ you are paying an employed level of tax and NI (national insurance), as you would if you were an employee of a client.
It possible to work ‘outside’ the scope of IR35 if you are a limited company contractor genuinely working on your own, i.e. using a contract to provide services, not “employed” by a client. If you work outside the scope of IR35, then you may enjoy better tax efficiency and the benefit of being able to pay yourself a combination of dividends as well as salary.
Why is it so important?
It is imperative to work completely within the remit of tax rules and legislation, so contractors must take the time and effort to ensure that they are, as it is their responsibility as a contractor. Even for the most diligent of contractors, understanding whether you should be working inside or outside the scope of IR35 can be confusing. However, as of 6th of April 2021, the responsibility for determining contractors status will fall with the client and not the contractor, meaning agencies will be responsible for determining the tax status of contractors, whether they are inside our outside of IR35. That’s where we can help. Our team of IR35 professionals will review your specific case and help you determine how you should be operating, what forms to fill out, and how to ensure you’re working legitimately.
What is changing?
As of April 2021, the responsibility for determining workers’ employment status will fall with the client (i.e. agency) rather than the worker themselves. This legislation change applies to all large, medium or private sector companies and agencies, and is called ‘off-payroll working’. It is important to note, however, that IR35 status tests will remain the same.
What does it mean for contractors?
As a contractor, you will no longer be your responsibility for determining your status of employment i.e. whether you’re an employee or can be paid via your limited company as a contractor.
This means that if a contractor is registered as self-employed but is found to be working as an employee, the end client will be responsible for paying any additional tax due. While the contractor holds no liability for their employment status, they may still experience a deduction in earnings as they will have to be placed on the payroll of the company.
However, the new reform is not retrospective and will not look to target previous years’ tax payments for those whose status will change in and outside of IR35. If your contract falls inside of IR35 you may have to move to an umbrella company.
What does it mean for agencies?
From April 2021, agencies will be responsible for determining the employment status of their workers and whether they fall inside or outside of IR35. It may also be the agency’s responsibility to ensure that the correct income tax and National Insurance are deductions are made if the contractor falls inside of IR35.
If you need guidance in determining your contractor’s status or help to move your contractors to umbrella payments, get in contact with our friendly professional team to find out what we can do for you.
At Red Ark, we also offer training to agencies and their teams to ensure they’re ready for the new IR35 legislation and the changes that will bring.
What can I do now?
Make sure you are keeping up to date with any changes in legislation and tax law by working with trusted and professional payroll services who make it their job to ensure you are always working legitimately and conducting payroll services appropriately.
Ensure your team are ready for IR35 changes through training with our experts.
Contact our friendly, knowledgeable staff today to discuss your IR35 needs.