Understandably, many contractors and the organisations that rely on these workers are concerned about this latest reform. But despite plenty of scaremongering and unhelpful speculation, IR35 is manageable — so long as you take a pragmatic approach.
How do the new IR35 rules work?
Also known as the ‘off-payroll working rules’, IR35 applies to you if your business (the client) receives services from a worker through their own limited company or another type of intermediary.
The rules are intended to ensure workers who would be an employee if they provided their services directly to you, pay broadly the same Income Tax and National Insurance contributions as regular employees. If the rules apply, Income Tax and employee National Insurance contributions must be deducted from fees and paid to HMRC, as well as employer National Insurance contributions and an Apprenticeship Levy, if applicable.
Before 6 April 2021, it was the intermediary’s responsibility to decide a worker’s employment status for each contract. For small clients in the private sector, this remains the same. However, if you’re a medium or large business, the responsibility of determining the status of any contractors you engage with now falls on you. The contractor’s services can either be delivered ‘outside IR35’ (self-employment) or ‘inside IR35’ (employment).
How does IR35 impact contractors working abroad?
Unfortunately, the locations where duties are performed have no bearing on IR35. The off-payroll working rules apply to any contractor that is a UK resident and trading via a UK-based limited company — no matter where in the world they’re working from.
HMRC has also tightened rules regarding tax residency. In the past, it was sufficient for contractors to spend a certain number of days outside the UK to be considered ‘offshore’. Now, HMRC will look at a worker’s ties to the UK, such as family and a UK-registered and trading company. This means HMRC could deem a contractor to be a resident in the UK, even if they spend most of the year out of the country.
So, even if a contractor is working for you in a country that is a member of the European Economic Area (EEA) — such as Germany, Belgium or Spain — or in jurisdictions with a ‘Reciprocal Agreement’ (RA) with the UK regarding tax and social security, IR35 legislation will apply.
However, because workers are liable to make social security contributions to the state they’re working in, the National Insurance contributions (NIC) element of the IR35 rules won’t apply. That means any deemed payment calculation won’t include NICs. The same is true for countries with an RA, such as the US. IR35 will still apply, but contractors working in the US should make US social security contributions.
For contractors working in two member states, special EEA rules apply, and the worker will be subject to the legislation of the member state in which they reside.
How do you prepare for the IR35 legislation?
The IR35 reform poses several challenges to companies. Not only do the new rules require you to carry out IR35 status decisions, but they also shift the risk onto you, as the client.
For many businesses, the fear of being held liable for incorrect IR35 decisions has been enough to ban contractors altogether. However, insisting that all contractors work via umbrella companies or become employees to avoid IR35 considerations is not the right way to go. If anything, this approach will see you needlessly absorb the costs involved with hiring employees.
Instead, you should assess the worker’s IR35 status with ‘reasonable care’. HMRC’s definition of ‘reasonable care’ is open to interpretation. But generally speaking, it means you need to carefully consider the specific factors which lead to each IR35 decision — not just brand every contractor as ‘outside IR35’.
Once you’ve assessed a contractor’s IR35 status, you must inform them of their position via a Status Determination Statement (SDS). Until an SDS has been issued, you’ll hold onto the fee-payer responsibilities, meaning you’re ultimately liable for IR35 and will be tasked with deducting the correct amount of tax and paying this to HMRC. If a contractor is deemed ‘inside IR35’, they’ll be taxed PAYE. This tax must be subtracted from their timesheet or invoice and sent to HMRC, so it’s essential to have a compliant payroll process in place.
But rather than burdening themselves with this compliance headache and tackling the regulatory maze themselves, many companies (wisely!) choose to outsource this activity to a third-party specialist, such as a Professional Employer Organisation (PEO), instead.