Are you ready for the IR35 changes on 6 April 2021?

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If you use independent contractors who operate through a personal service company (PSC), you should read this blog.

From 6 April 2021 as the client or intermediary using independent contractors you will become liable for income tax and national insurance contributions (NICs) on the fees you pay to an independent contractor, if the relationship between you and the independent contractor is deemed by HM Revenue & Customs (HMRC) to be what is called ‘inside IR35’.

What does ‘inside IR35’ mean?
If the arrangement is judged inside IR35, the independent contractor will be considered by HMRC as an employee for tax reasons. This means you will be required to pay tax at the same rate as an employee in the same tax bracket.

If the contract is judged inside IR35, the sums received by the PSC are, in effect, treated as employment payments by the PSC to the independent contractor for tax and NICs purposes and will therefore be subject to pay as you earn (PAYE) taxation. However, this is calculated at the end of the year on the deemed income, after allowing a 5% deduction to cover general expenses (unless there is supervision, direction or control, in which case PAYE must be accounted for monthly on actual payments made throughout the year).

What does ‘outside IR35’ mean?
If the arrangement is judged outside IR35, the independent contractor will be considered by HMRC as self-employed for tax purposes and is free to pay himself in the most tax efficient way, which is typically through a mixture of salary and dividends taken from the PSC.

Contract is key
The starting point in determining IR35 status will be the contract you have with the PSC.  HMRC will want to see certain provisions in the contract regarding: (a) mutuality of obligation; (b) control; (c) substitution; (d) duration of the work; and (e) payment.  There is no such thing as an ‘IR35 proof’ contract.  HMRC can look behind the contract to determine the relationship between you and the PSC and how this operates in practice.

Therefore, from 6 April 2021 if IR35 applies, the relevant tax and NICs are payable by you and not the PSC. HMRC may also charge interest and penalties on overdue tax and NICs payments.

At IBB Solicitors, we can prepare contracts for you that will be what HMRC will expect to see and structure this in a way that will be outside IR35 where possible.

The material contained in this blog is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken

Contact our specialist IR35 solicitors today

IBB Solicitor’s employment law specialists represent businesses using independent contractors. If you have an issue regarding IR35, we can offer fast, reliable guidance on what to do next.

Contact Marc Jones, Partner today on 03456 381381 or email him your details to marc.jones@ibblaw.co.uk.  Please note that the advice we provided is not chargeable.