IR35 – one year on in the private sector
The new IR35 rules for the private sector have been in place for nearly a year. We review the impact on contractors and clients.
The off-payroll working rules (IR35) were extended to the private sector in April 2021, moving the responsibility for determining employment status from the contractor to the end-client (for medium and large businesses).
This has led to a significant shift in how contractors are engaged, with many firms opting for 'inside IR35' determinations or requiring contractors to work through umbrella companies. For contractors, it is vital to understand your status and ensure you are being taxed correctly, while for clients, having a robust status determination process is essential for compliance.
The impact on contractors
For contractors caught inside IR35, the financial impact is substantial. The fee payer (usually the client or recruitment agency) must deduct Income Tax and employee National Insurance at source, significantly reducing the contractor's take-home pay. Furthermore, the contractor cannot claim the same travel and subsistence expenses as they could if they were outside IR35. Many contractors have had to renegotiate their day rates to compensate for this loss of income.
The burden on end-clients
Medium and large businesses must now issue a 'Status Determination Statement' (SDS) for every contractor they engage, outlining their IR35 status and the reasons for that decision. Blanketing all contractors as 'inside IR35' without individual assessment is not permitted. Clients must implement robust processes, often using HMRC's CEST tool or independent legal advice, to assess status accurately. Getting it wrong can lead to significant tax liabilities and penalties.
The small company exemption
It is important to remember that the new rules do not apply if the end-client is a 'small' business. To be classed as small, the client must meet two of the following criteria: an annual turnover of £10.2 million or less, a balance sheet total of £5.1 million or less, or 50 employees or fewer. If the client is small, the responsibility for determining IR35 status remains with the contractor's own personal service company.
Disclaimer
The information contained in this article is for general guidance on matters of interest only. It should not be used as a substitute for consultation with professional accounting, tax, legal, or other competent advisers. Before making any decision or taking any action, you should consult a Kingscott Dix professional.