IR35 (Inland Revenue 35/ Off Payroll Rules) was a game-changer for contractors and the companies they work for when it was brought in by the UK government more than 20 years ago, highlights Kris Simpson.
Since then, the tax avoidance legislation has evolved at such a pace that workers face a challenge just to keep up with the latest rules.
Initially introduced in response to a trend of employees leaving their permanent employment and then returning to the same employer as a personal service company contract worker, it essentially prevents contractors from reducing their taxes through a limited company while maintaining a permanent position with the end-hirer.
If the worker operates inside IR35, they are classed as having the same tax status as an employee so must therefore pay the same rate. Conversely, if they are outside of the legislation, they are usually directors of their own businesses, are paid using mechanisms such as dividends and are responsible for their own taxes.
The biggest change to the law came in April 2021, when the responsibility for determining the contractor’s IR35 status was transferred from the worker to the employer. This meant that private sector companies employing contractors had to check their IR35 status and pay PAYE and NICs if those workers fell inside the law.
This has caused much confusion among companies and their contractors about what their status was. To help, here is a guide outlining everything you need to know about IR35 and how to remain compliant.
Meeting the requirements
Given the big changes that have been made in a short space of time, it’s vital that businesses keep on top of what is happening and any future modifications to the law. As a result, HR professionals must make sure that the right rate of tax is being paid by the contractor, while continuing to protect their rights.
To meet these IR35 requirements, they need to put in place the appropriate resources and training. There are a host of courses available, therefore it’s important to choose one that is offered by a reputable provider, such as the Chartered Institute of Payroll Professionals.
Setting out the terms
IR35 has changed much in terms of employment, but the recruitment process is still basically the same. Employers need to find the best contractor, but in doing so they must be fair when selecting them and engaging with them.
That requires setting clear expectations and timeframes for work to be completed. It also entails prompt and equitable payment for the agreed amount or rate as stipulated in the contract for duties performed to a certain expected standard.
The umbrella company solution
Despite all this, there’s no denying that IR35 can be a complex law to get to grips with. That’s why using an umbrella company to do it instead may be advantageous.
The umbrella company will assume responsibility for the contractor’s tax administration. After the contract has been drawn up, the umbrella company makes sure that it’s signed by both parties and that the worker receives the right compensation and pays the correct level of tax.
In order that IR35 compliance to be met, the umbrella company is paid by the business and then transfers the funds to the contractor. In this way, a straightforward and seamless payment process is established.
Contractors believe that umbrella companies can be hugely beneficial in helping with the IR35 process. That’s borne out in our research, with 70 percent claiming that they considered using an umbrella company to avoid any problems with the legislation.
Now it’s up to firms to make sure that they comprehend and comply with the latest changes to IR35 when hiring contract workers. The easiest way to do that is through using a reputable and compliant umbrella company.
Kris Simpson is the Country Manager UK at Cool Company.
Amelia Brand is the Editor for HRreview, and host of the HR in Review podcast series. With a Master’s degree in Legal and Political Theory, her particular interests within HR include employment law, DE&I, and wellbeing within the workplace. Prior to working with HRreview, Amelia was Sub-Editor of a magazine, and Editor of the Environmental Justice Project at the University College London, writing and overseeing articles into UCL’s weekly newsletter. Her previous academic work has focused on philosophy, politics and law, with a special focus on how artificial intelligence will feature in the future.