Reform of IR35 tax rules returns for freelancers

As if dealing with Covid-19 and its economic fallout were not enough, 2021 will bring another headache for thousands of small businesses and entrepreneurs. The widely despised IR35 reforms are to make a return in just over three months’ time.

The reforms had been due to come into force last April, but at the last minute the government decided to delay their introduction, recognising that businesses had more pressing priorities as the pandemic exploded. But ministers made it clear this was a postponement rather than a change of heart, and the new rules are due to take effect on 6 April.

The headline change is that from that date onwards, most businesses employing contractors will be required to assess the tax status of these suppliers – and in many cases to bring them on to their payrolls so that they pay income tax and national insurance through the PAYE system.

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Full-timers in disguise?

The aim is to crack down on disguised employment, when businesses take on contractors or freelancers to do a job where they are really just employing them, but calling it something different. The business makes a saving on employer’s national insurance contributions in this way. The contractor, often set up as a personal-services company, may also be able to make a tax saving.

The new rules will bring the private sector into line with the way the public sector has operated since 2017. Each time a business enters into an agreement with a contractor or a freelancer, it will have to determine whether the supplier is a genuine third-party entity or whether it is caught within the scope of the IR35 regime. If the latter, the supplier must be paid through PAYE.

One big issue is that there is no watertight definition of which contractors fall inside or out of IR35. HM Revenue & Customs depends broadly on three tests: whether the contractor has control over where, when and how they perform the work; whether the contractor has to do the work themselves or is entitled to send someone on their behalf; and whether the employer is obliged to offer work and the contractor is obliged to accept it. But these are broad principles and there are plenty of grey areas.

So much so, in fact, that there are serious doubts about HMRC’s ability to apply the new rules fairly and consistently. The tax authority has launched an online tool where businesses and contractors can check their tax status, but one in five such checks fail to report a conclusive result, according to one recent study.

Contact employers now

If you’re a freelancer or contractor currently working outside of the IR35 regime, it is important to talk to clients as soon as possible about how they intend to operate the new rules and whether you’ll be affected. For those forced to move into the PAYE system, there may be larger tax bills to pay. Others may find that risk-averse businesses are now very reluctant to take on contractors and suppliers in the way they have done in the past.

If you run a business that uses contractors and freelancers, be sure you are ready to operate within the new rules. There is an exemption for small businesses, defined as meeting at least two of three criteria: having a turnover of less than £10.2m, a balance sheet worth less than £5.1m and no more than 50 employees. They will not be required to apply the new rules. But every other business must be ready to comply.