In April 2021 the rules on IR35 change for the private sector. In this mini-series of posts, we will look at what the changes are and how it works. We will begin with a short summary of how IR35 works and what the changes are.
How does IR35 work?
The best way to illustrate how IR35 works is to take an example, as follows:
Simon – Simon Limited (PSC) – ABC Limited
- Taking this example, normally Simon would be employed by ABC Limited and pay tax and NI in the normal way.
- ABC Limited would pay Employers NI.
- This structure changes that. Simon sets up a Personal Service Company called Simon Limited. He is employed by them. Simon Limited charge ABC Limited a fee for his services.
- The benefits to Simon are he pays less tax. As he is an employee and shareholder of Simon Limited, he can take a low salary (paying less tax) and then take dividends at much lower rates. He could be up to 25% better off.
- The benefits to ABC Limited are twofold. Simon is not an employee, so he has no employment rights, and they save Employers NI, a significant saving.
- IR35 says is if this is a sham, and Simon is really employed by ABC Limited, he will be a “deemed employee”. His PSC Company, Simon Limited, then has to pay the taxes he should have paid as an employee.
What do the changes mean for private companies?
The newer rules introduce a different set of tax treatment. This means that medium/large firms like ABC Limited will now have to assess the contractor’s status. More importantly, they will have to pay employment taxes, including the Apprentice Levy if applicable, on top of the fees paid to the contractor if they are also the fee payer. This new tax is now widely referred to as the “Off-Payroll Tax”.
Who will the changes affect?
IR35 will only initially be introduced to medium and large businesses, not small. In our example above, this means ABC Limited. If your business can satisfy two of the three points below, you are not required to implement IR35 yet:
- Less than 50 employees.
- Maximum of £5.1million on its balance sheet.
- Turnover of less than £10.2 million
If your business ticks at least 2 out of the 3 criteria above, you will be considered a small business for the purpose of IR35 and IR35 will not apply.
There are also rules which cover connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to apply the rules.
How will I know if IR35 will apply?
The key issue when looking to see if IR35 applies, is whether the individual is in reality an employee. This is underpinned by employment legislation and case law. In our next post we will explore this.
Worried about IR35?
Get in touch with Lisa Lenton at firstname.lastname@example.org and we can help.