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HMRC changes to IR35 are now due to come into force in April 2021. As a freelancer, it is important to understand how these changes may affect you.
HMRC is instigating essential changes to how IR35 is implemented. As a freelancer, you must stay on top of your tax obligations and be aware of any legislative changes that may affect you, including changes around IR35.
The changes were due to come into force in April 2020. Due to the coronavirus crisis, they have now been pushed back to April 2021 at the earliest; this gives you reasonable time to inform yourself and prepare for the IR35 reforms fully.
Photo by Steve Johnson and blog by Lauren Stevens
IR35 is the UK’s anti-avoidance tax legislation. It aims to tax “disguised employment” at the same rate as salaried employees working for a company.
Contractors who do not meet HMRC’s definition of self-employed have to pay more tax and National Insurance contributions under IR35 rules.
Freelance workers receive payments from clients via an intermediary (i.e. their own limited company) and can, therefore, pay themselves in dividends which are not subject to National Insurance.
This counts as “disguised employment” when you would be classed as an employee if you were contracted directly with a company.
IR35 applies if you do not meet HMRC’s definition of “self-employed”.
This goes beyond the details of your contract with a client. HMRC may examine working practices you have with a client and whether the relationship is of an employment nature. For instance, how much supervision, direction and control do the clients have over you? Are you working as part of a team within the company and have delegates or substitutes to take your place? Is your client obliged to offer you work and are you required to accept it? All of this and more defines the nature of the working relationship.
If you are unsure of your IR35 status, HMRC has an online tool to check employment status for tax. There are also online calculators which provide guidance, such as Crunch’s IR35 calculator.
As it stands, it is your responsibility as a freelancer to determine your employment status for each assignment. However, this is soon to change.
Under the pending legislation, clients will determine the IR35 status of an assignment and provide this to you on a Status Determination Statement (SDS). Provided there is no dispute, it is then up to the client to pay for any tax liabilities arising from the SDS.
Be aware that this only applies to medium or large businesses in the private sector and all companies in the public sector. Small private companies that meet two or more of the following criteria are exempt:
o Annual turnover is no more than £10.2 million
o Balance sheet total is no more than £5.1 million
o No more than 50 employees
Also, there will no longer be a 5% allowance for contractors to meet the costs of administering off-payroll working rules.
Disputes over the IR35 status are to be dealt with between contractor and client.
HMRC are yet to determine precisely how this will work in practice although, there will be a time limit of 45 days for a client to respond to a dispute.
Due to the coronavirus crisis, these changes have been pushed back from April 2020 to alleviate pressure on businesses and contractors.
Disputes over the IR35 status are to be dealt with between contractor and client. The client will have up to 45 days to respond to a dispute. HMRC is yet to determine exactly how dispute resolution will work in practice.
The reforms are currently scheduled to be introduced in April 2021 at the earliest. More information on IR35, the planned changes and your responsibilities are available on the government website.
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