IR35 – Six key questions, answered

IR35 – Six key questions, answered

26th February 2021

Like a classic Shakespearean drama, the IR35 story is both long and complicated. Act III is due to start, again, on 6 April 2021. Once more unto the breach, dear friends, once more.

1) What is going on?

The IR35 “off payroll” tax change is coming to large and medium sized private businesses from 6 April 2021. The changes were originally meant to start operation in April 2020, but they were delayed until this year due to the pandemic.

2) Will it be delayed again?

The answer is ‘no’. For now.

Although the government could delay their introduction again, there has been no indication that they will do so. With almost a year to consider another delay, we would have expected some official indication before now if a further postponement was on the cards. In late 2020 some technical changes were made to the legislation so it could be ready for April 2021 – an indication that the plan is to proceed this year.

Although we cannot know for sure, a betting man would put their money on a 6 April 2021 introduction.

3) I know about IR35, where can I get more information?

For those of you who want to get straight to the nitty gritty, see our IR35 special report.

This report gives an overview of the rules, what is changing, and the options for end users to consider.

A recently published HMRC briefing is also worth reading for detail on compliance enforcement. Although it mostly confirms what we already knew, it helpfully reiterates that there will be no penalties for inaccuracy in the first year and repeats HMRC’s commitment not to open enquiries into earlier years based on information gathered from the new rules (unless they suspect fraud).   

4) I don’t know about IR35, what is it?

IR35 is shorthand to describe two sets of tax legislation that are designed to apply employee tax rules to contractors, and the firms hiring them, who are supplying their services via a limited company (or other intermediary) who would be an employee if the intermediary was not used.

5) Who is exempt as a small business?

The changes do not apply where the client entity (i.e. the entity receiving the services) is considered to be a “small” business in UK corporate law, which depends on the client satisfying at least two out of three specific tests:

  • It has an annual turnover not exceeding £10.2m
  • It has a balance sheet total not more than £5.1m
  • It had an average of no more than 50 employees for the company’s financial year

If a client company is not a “small” business, then it will need to take the IR35 changes seriously.

6) I think it might apply, what should I do?

The first step for HR or operations is to audit their consulting/contracting relationships, to determine whether there are any potentially affected contractors of the business. 

Once that is done, the business will need to consider if they will be caught by the new IR35 law changes. This may involve some tricky legal assessments. If the answer is yes, then the contractual documents will need to be updated, and in some cases there may need to be pricing negotiations with the contractor to reflect the new economics of the relationship.

To help determine status, HMRC have a tool that is easy to use and can be a useful first step. It is called the Check Employment Status for Tax (CEST) tool and can be found here.

For many in the industry, this all has a sense of déjà vu. Around this time a year ago, we were talking about the very same topic. However, it seems like Act III’s curtain will raise in April. In the words of Shakespeare’s Henry V himself, “the game's afoot”.