IR35 for the bewildered
The changes to off-payroll working (IR35) rules for the private sector came into force on 6 April 2021. So who determines a freelancer's IR35 status now? Plain-speaking online accountants Crunch explain the new rules…
The new IR35 rules will have a significant impact on contractors working through a Personal Service Company or PSC (a limited company, for example), recruitment agencies and all large and medium-sized end-clients in the private sector.
Now that the new rules have arrived, PSCs – freelancers and contractors, in other words – are no longer responsible for assessing the IR35 status of their own assignments. The end-client (in our industry the marketing or advertising agency) is now responsible for determining whether an assignment is inside or outside of IR35 rules.
All parties involved in a labour supply chain need to ensure they remain IR35 compliant.
If your contract is inside IR35, the end-client (or recruitment agency if they payroll their candidates) will pay Income Tax and NICs (employers and employees) to HMRC.
The end-client must make the decision and pass a record of the status assessment, known as a Status Determination Statement (SDS), to all parties in the labour chain (see below).
The changes for the private sector mean the end-client is now, usually, responsible for determining the IR35 status of an assignment and with it your employment status.
Small business exemption
The IR35 rules now apply to ‘medium or large’ sized businesses in the private sector and all organisations in the public sector. There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:
- Annual turnover is no more than £10.2million
- Balance sheet total is no more than £5.1million
- No more than 50 employees.
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the PSC and the new rules do not apply.
The end-client may be a smaller subsidiary of a parent company - for example, a newly formed agency within a global group or network. However, the legislation applies to the parent company based on its entire size, turnover and balance sheet total, and not the smaller offshoot.
Provided an end-client or hiring business is completely based overseas, with no UK offices or branches, then the new rules do not apply. Then it remains the responsibility of the PSC to assess the IR35 status of their assignment and pay any employment taxes due, as before.
IR35 Status Determination Statement (SDS)
Once the end-client has decided on an assignment’s IR35 status they must provide a ‘Status Determination Statement’ (SDS). The SDS must be provided in writing to the freelancer before the assignment commences.
These arrangements place most of the responsibility for administering an SDS on the end-client and the recruitment agency if they payroll their candidates.
5% administration allowance withdrawn (mostly)
The new rules remove the 5% allowance for PSCs to meet the costs of administering the off-payroll working rules. The allowance will continue for PSCs working with ‘small’ end-clients. The allowance will also continue for assignments where the end-client is based entirely overseas.
Crunch has produced its own free IR35 Calculator tool which takes into account all the factors that could affect your IR35 status. The tool has been independently verified by leading IR35 experts and can be used by contractors to get a free IR35 status assessment.
The legal nitty-gritty
- Freelancers and contractors will not have to pay penalties for errors relating to off-payroll assignments in the first year, except in cases of deliberate non-compliance
- The new rules will only apply to services carried out from 6 April 2021
- The government will place a legal obligation on clients to respond to a request for information about their size from an agency or worker
How does IR35 affect sole traders?
IR35 rules do not usually affected sole traders. The end-client has always been responsible for deciding the employment status of an assignment that is carried out by a sole trader. Employment taxes are not accounted for at source if a person is truly self-employed. The new IR35 rules do not change this at all. However, end clients do need to ensure that they correctly assess any roles they offer to sole traders and the working practices involved.
Crunch’s IR35 Hub has all the help and support you need to understand IR35 and how it affects you. They have also published an article on Getting your contractor business ready for IR35 in the private sector. Their IR35 Calculator gives contractors a free, accurate IR35 assessment of any assignment.
This article has been adapted from a longer version by online accountants Crunch, originally published on 7 April 2021. For up-to-date information and advice please consult a professional accountant.
Thursday 29th April 2021