Spring statement 2022: the key stories for contractors
On Wednesday 23rd March, Rishi Sunak, the Chancellor of the Exchequer, delivered the Spring statement 2022. This will be followed…
If you’re new to contracting, or have been taking a bit of a break, you may not be up to…
If you’re new to contracting, or have been taking a bit of a break, you may not be up to date on the changes to IR35 legislation that came into effect last year.
Of course, IR35 has been around since 2000, but back in 2016, it was announced that the reforms would be made to crack down on ‘disguised employees’ in the public sector. This was eventually expanded to the private sector, with those changes set to launch in April 2020. However, the global pandemic caused the Chancellor to delay them by a year to April 2021 and contractors have been living with those changes for almost a year now. But what were those changes?
The IR35 legislation was originally designed to ensure self-employment wasn’t being used as a ‘disguise’ for permanent employees to save money for both the ‘employer’ and ‘employee/contractor’. Historically, the contractor was in charge of declaring their IR35 status for each of their contracts, letting HMRC know if they are ‘inside’ (effectively an employee) or ‘outside’ (genuinely self-employed) IR35 as part of their Self Assessment. The contractor also held the tax liability. However, the reforms to the legislation have changed how this works.
As of April 2021, it is usually the end-client who is responsible for determining a contractor’s IR35 status. They do this by producing a Status Determination Statement (SDS) which declares a contractor either inside or outside IR35 for that particular engagement. This is then passed down the contractor supply chain to the fee payer (if the fee payer is not the end-client). It is the fee payer (this might be a recruiter, agency or the end-client themselves) who hold the liability for tax, and who is responsible for deducting tax and National Insurance through PAYE if the contractor is deemed to be inside IR35.
If a contractor is found to be inside IR35, they are taxed at source and at the same rates as an employee. If the contractor is outside IR35, they continue to be responsible for their own tax and National Insurance through Self Assessment.
A disguised employee is a contractor who, to all intents and purposes, fulfils the same role as a permanent employee, but is hired as a contractor and paid through their limited company. This means that the contractor gets a more generous tax rate, while the end-client doesn’t have to pay for employers’ NICs, insurance, or any other administrative costs of hiring an employee. Ultimately, this approach sees HMRC lose out, so IR35 aims to tackle it.
To determine whether or not you are a disguised employee, you and your end-client should be looking at elements such as:
These are the same issues that HMRC would look at if they were carrying out an IR35 investigation into your contract and so they should also be used to determine your status. If you do not have control, cannot send a substitute, or you are expected to continue accepting work from the client, you could well be deemed a disguised employee. We recommend using a service such as the Kingsbridge IR35 Status Tool to accurately determine your IR35 status so that you can see the strengths and weaknesses of your case.
The legislation reforms have not changed IR35 for all contractors. There are still some cases in which you as the contractor are responsible for determining your own IR35 status (and still hold on to any tax liability). These include:
You can read more about when a contractor is and isn’t responsible for IR35, including all of the variables, on our Knowledge Hub.