Understand the Government's IR35 rules, how they apply to you and your contractor, and ways to ensure you're not caught out.
Contracting has been a popular option for many years, both for professionals and for organisations who need part-time or fixed-term support. It might look like a 6-month placement to help launch a project, or 18 months to overhaul a department's structure. Whatever your business needs, hiring a contractor can be a great option.
As with most things, there's also the need for SMEs and limited companies to carry out their due diligence when bringing in an external professional - including IR35.
Sound complex or a bit jargon-y? You're not alone. So if you've never heard of the term, or aren't sure if it applies to you and your SME, we're here to help.
Arguably the simplest way of explaining IR35 is a measure with which the Government mitigates tax avoidance.
In short, the rules ensure that any professional who might otherwise provide the same services as a full-time, permanent employee of a business pays the correct amount of Income Tax and National Insurance contributions.
IR35 rules apply to a number of individuals:
It's important to understand who is responsible for adhering to these rules, as well as whose overall responsibility it is to assess the rules. There were changes to this in April 2021 (more on that below) so you may want to review your processes if you haven't already done so.
To check (and double check) if these off-payroll working rules apply to your individual situation, you can use the Government's service to help.
IR35 isn't new legislation, but it has changed very recently, namely in who owns the declaration.
Prior to changes - which came into effect back in April 2021 - the majority responsibility of working out whether IR35 applies was with the contractor themselves. There were a few notable challenges to this, namely that a sole professional may not be fully aware of the rules, or even that they existed in the first place.
Whereas the business hiring a contractor will likely have accountants or a finance department, perhaps even advisors who can support compliance. Which is precisely where the change comes in…
Businesses are now responsible for deciding whether their contractors are within IR35 or not. This applies to medium and large businesses, and the contractor should be provided the rationale behind the decision. This is typically in a document called a 'Status Determination Statement', which looks like a basic questionnaire. The contractor is then given the opportunity to dispute the decision.
If the rules do apply to you and your business, it's likely you will need to pay additional fees to cover the contractor's Income Tax and National Insurance contributions.
Yes and no.
In some cases, it is possible to avoid IR35. Normally, this would be hiring someone who is registered as self-employed (and therefore will complete self-assessments and pay tax and NI contributions from there), and within the self-employment criteria.
Some businesses might choose to hire overseas to avoid IR35, but of course, this doesn't negate other, perhaps even more complex tax implications. So it should proceed with caution.
Freelancers who have their own infrastructure, such as their own brand, equipment, invoicing and contracting etc., may also be a viable option, and keeping some level of separation (that is, avoid inviting your freelancer to company socials, and don't conduct HR-like appraisals) is a good idea.
Ultimately, your best course of action is to speak to a consultant very much in the know. That's likely you’re an accountant, business advisor, or perhaps even HR support. It will pay to do so - perhaps more than you currently realise!