The Complete IR35 Guide for Contractors & Businesses 2021 - hubbado

What is IR35

IR35 is a tax anti-avoidance rule designed to combat “disguised employment” in situations where an individual contractor is providing personal services (their labour) to an end-user via their own intermediary such as a personal services company (PSC). IR35 applies when the contractor would be an employee (or officeholder) for tax purposes if they were hired directly by the end-user. If IR35 applies, PAYE and NICs must be applied in respect of the fees paid to the PSC.

The proposed IR35 reforms for the private sector, now planned to take effect from April 2021, represent the biggest change to employment tax for decades. New IR35 legislation is designed to crack down on ‘disguised employment’ by reclaiming what HMRC sees as lost tax and national insurance contributions. The Treasury expects the new IR35 legislation to net circa £1.1 billion in the first year alone.

Until April 2021, businesses in the private sector can engage contractors using personal services companies (or other intermediaries) without having to give too much thought to the contractor’s status for tax purposes. This will change for large and medium-sized private-sector businesses under the proposed IR35 reforms. The reforms will switch the responsibility for determining a contractor’s status and, if appropriate, operating PAYE and National Insurance contributions (NICs) from the personal services company to the end-user business.

If you are a client that hires contractors, or a contractor or freelancer working through your own limited company in the UK, then you need to be aware of the new off-payroll rules as these can have a big impact on payments, tax and national insurance.

Recent IR35 news

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With just 4 months to go, half of hiring firms in the UK still haven't adopted a compliance protocol, and just 3% of contractors trust CEST to accurately reflect status law...

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Generally, the End-User should take the following into account:

control and working arrangements: how much direction does the End-User have over contractor?
substitution: can the contractor send a substitute?
integration: how involved is the contractor on the business?
risk: does the contractor carry on business on their own account; do they take financial risk? and
control: how control much can the End-User assert over the contractor?

Here are some general factors to be considered where status determination is required:

Being in business as a contractor: Contractors should show evidence of their own financial risk and being in business for themselves rather than their clients. Contractors should aim to show as many of the following proofs of business on their own account as possible, as showing just one or two many not be enough for HMRC:

Company names: Contractors should never name their company after themselves, instead they should use a business name that reflects the work being done e.g. ABC Engineering and suggests that it is not necessarily a one person company.

Multiple clients: If possible, contractors should try to split their time fairly between two or more main clients, this makes it harder for HMRC to claim that the contractor is an employee of any of them.

Marketing materials: Contractors should be able to demonstrate their own marketing materials to engage new clients e.g. a website, listing on a relevant services website, or business cards. Branding should be never look similar to client branding.

Company insurance: having their own company insurance like professional indemnity insurance, is a good way for contractors to demonstrate that they are not an employee.

Office space: Having an office, even one in their own home, software licences and professional memberships in the contractor company name implies that the work carried out extends beyond the current client.

Professional development: Paying for their own training is another way for contractors to demonstrate that they are in business on their own account.

Well written contracts may insulate contractors from IR35 risk and set out a position which clearly avoids and employer and employee relationship, including:

Weekly minimum hours, pension arrangements or other benefits and subsidised services should not apply to the contractor
A duty to provide work for the contractor and a duty to accept it should be avoided
The contract should contain a right of substitution
The contract should not stipulate how work is to be carried out
Exclusivity clauses should be avoided, as should regular or guaranteed weekly or monthly payments, including retainers
Liability and indemnity provisions should be included
Termination provisions should be included, but only for breach of contract
Intellectual property should set out suitable demarcation
Insurances should be stipulated
Data protection controller and processor distinctions should be made
Where possible, employee-equivalent restrictive covenants should be avoided

Summary from our IR35 experts

It should be stressed that the changes in IR35 in April 2021 should not represent (as some have argued) an end to the use of self-determination by PSCs. Provided that End-Users act reasonably (and with care), thereby avoiding blanket determinations, there are a number of practical and contractual measures designed to preserve the contractor’s ability to determine their own status, which are set out above.

If you would like further clarification of any matter discussed here, please contact us, we will be delighted to help.

Hear from the IR35 Experts

A virtual Q&A on IR35 and umbrella services. Get an overview of the difference between PAYE, PLC and Umbrella services for IR35, and the effect on benefits and take home pay. Hosted by Hubbado and Paystream

Contact Paystream

Thomas Bennett, the founder of Henry & Co law firm, specialises in IR35 legal & contractual issues, offering options and advice for contractors on how to avoid IR35

Contact Thomas

Christian Faires, consultant at Forma, provides IR35 accounting and tax solutions to personal service company owners and directors. Chartered accountancy background and formerly Managing Director at a leading UK contractor accounting specialist firm.

Contact Christian

Stuart Juggins, founder of Aardent, advises & leads the recruitment industry on building & using effective and compliant solutions using SOW & interaction with IR35. Former roles as the Group Head of Solutions for Adecco, Experis & European Head of Professional Services for several global Systems Integrators.

Contact Stuart

IPSE's deputy director of policy and external affairs, Andy Chamberlain, spoke about leading the fight for freelancers and contractors against IR35 at all levels of government.

Contact Andy