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It has been described as the biggest change to employment tax for decades. 

The IR35 changes, planned for April 2020 and held up by the COVID-19 pandemic, are now set to go live in April of this year.

IR35 is often regarded as a complex and nuanced piece of legislation, and it is important to understand its core principals and how these will change in 2021.

In this article we look at the IR35 legislation changes, but if you are a contractor or business owner who may be affected by the law change, we recommend getting in touch with our team for tailored instruction in how to best prepare for the new IR35 rules.

What is IR35 and why is it changing?

IR35 has been around since 2000 and was imposed to reduce tax avoidance by assessing whether a contractor is a ‘genuine’ contractor as opposed to a ‘disguised’ employee.

Contractors who work via their own limited company can experience various tax benefits. Likewise, firms that hire contractors may also make savings e.g. on National Insurance.

The appeal of these savings might encourage some contractors and their clients to exploit this tax efficiency by working as though self-employed despite essentially being employees. 

In theory, IR35 could have not only reduced tax avoidance, but also protected workers’ rights. However, it is widely considered to have failed in both regards, hence the requirement to update the IR35 legislation.

The original IR35 legislation is being replaced with the new Off-Payroll Tax (still referred to as IR35), which was first launched in the public sector in April 2017. This will be extended to the private sector next month.

It’s hoped that the new legislation will provide greater clarity for those affected and prove easier to wield for HMRC, who have a mixed record in enforcing IR35 legislation to date.

Note: only medium to large-sized private businesses will be impacted by the rule change, at least initially.

How is IR35 changing? 

Currently in the private sector it is the contractor who judges whether their work is within the scope of IR35.

After April 2021, this responsibility will pivot to that of the business hiring the contractor.

Businesses will be obliged to explain their stance on whether a contractor’s work is within IR35 via a Status Determination Statement. It is within the contractor’s rights to dispute this statement should they feel the judgement is inaccurate.

Again, it is worth noting that such regulation is already in place in the public sector.

The changes might have left some business owners feeling concerned. Employment law is complex and for businesses unsure as to whether a contractor could be considered as an employee, it is worth taking specialist advice. 

Three principal “tests of employment” can help give an indication as to whether IR35 applies:

  • Control – how much control does the client have over the contractor’s work?
  • Substitution – does the contractor need to complete the project in person?
  • Mutuality of obligation – is the employer obliged to offer the contractor work – and must the contractor accept it?

We have simplified these points for the purposes of this overview and would urge businesses and contractors to prepare for the 2021 IR35 changes by seeking support from a tax expert. 

It’s recommended that businesses and contractors communicate with each other ahead of the April launch date in order to avoid accusations that reasonable care has not been taken when working out IR35 status – something that could result in an HMRC investigation.

IR35 changes in 2021 – a summary

Genuine freelancers should not be concerned about the IR35 legislation change. This is, however, a wide-ranging piece of legislation that must be taken seriously by business owners making use of contractors. 

For such businesses, due to IR35, it is likely a higher employment tax bill awaits. To discuss how to manage this process, don’t hesitate to get in touch with the tax specialists at Accountants East London for tailored advice.

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