Reform of IR35 tax rules returns for freelancers
The delayed shake-up of employment law governing freelancers kicks in soon
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.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
‘Sandwich generation’ carers losing £6,000 a year to support elderly relativesMiddle-aged adults are often caught between caring for children or grandchildren and their elderly parents, leaving them taking time out of the workforce and facing a huge hit to wages while they are still trying to save for retirement. We look at the true cost of caring.
-
Ground rents to be capped at £250 a year – what does it mean for you?The government has published draft legislation which would see ground rents capped at £250 per year for leaseholders. We examine what it means for homeowners and the housing market.
-
What turns a stock market crash into a financial crisis?Opinion Professor Linda Yueh's popular book on major stock market crashes misses key lessons, says Max King
-
ISA reforms will destroy the last relic of the Thatcher eraOpinion With the ISA under attack, the Labour government has now started to destroy the last relic of the Thatcher era, returning the economy to the dysfunctional 1970s
-
Nobel laureate Philippe Aghion reveals the key to GDP growthInterview According to Nobel laureate Philippe Aghion, competition is the key to innovation, productivity and growth – here's what this implies for Europe and Britain
-
'Investors should brace for Trump’s great inflation'Opinion Donald Trump's actions against Federal Reserve chair Jerome Powell will likely stoke rising prices. Investors should prepare for the worst, says Matthew Lynn
-
The state of Iran’s collapsing economy – and why people are protestingIran has long been mired in an economic crisis that is part of a wider systemic failure. Do the protests show a way out?
-
Hiring new staff for your business? Help is availableHiring more employees is a costly business, but help is available from the government, says David Prosser
-
'Expect more policy U-turns from Keir Starmer'Opinion Keir Starmer’s government quickly changes its mind as soon as it runs into any opposition. It isn't hard to work out where the next U-turns will come from
-
Why does Donald Trump want Venezuela's oil?The US has seized control of Venezuelan oil. Why and to what end?
