As of April 6th 2020, new IR35 tax rules come into play for locum workers who offer their services via a limited company or a recruitment agency.
But what is the IR35 and does it apply to you?
Read our in-depth guide to find out everything you need to know about the IR35 for locum workers, the upcoming changes, and how they could affect the way you pay tax.
What is IR35?
Also known as ‘Off-Payroll’ rules, the IR35 is a set of tax legislation designed to ensure both workers and employers are paying the correct tax.
The legislation applies to anyone who provides their services through an intermediary but who would otherwise be considered an employee if they were hired by a client directly.
These sorts of workers are called ‘deemed workers’ or ‘hidden employees’ by HMRC. Providing your services through a limited company – rather than through direct employment – can mean that you pay less tax. It also means companies do not have to offer the benefits you would be entitled to if you were an employee – like holiday pay and sick pay.
These workers are therefore ‘caught’ by IR35. Workers deemed to be within IR35 legislation must pay tax and NICs as though they were employed. In real terms, this means that your fee-payer will deduct income tax and NICs from your payment.
Does IR35 Apply to You?
If you provide your services through an intermediary like a limited company or a recruitment agency, it’s important to understand whether your contract falls within IR35 rules or not.
If you’re found to be operating within IR35 rules, you could be responsible for backdated income tax, NICs, and late payment fines.
Understanding whether IR35 applies to you can be tricky, and HMRC calculates each case individually based on complex employment laws. However, there are a few key things that can tell you whether you’re a true contractor or a ‘hidden’ employee:
- Supervision, Direction, and Control – Contractors are supposed to control how and when they work. If a client is found to be supervising, directing, or controlling the way you work, you may be considered an employee rather than a contractor.
- Substitution – Could you send someone else to do your job in your place? If your client has hired you specifically for your skills and would not accept a substitute, you could be classed as an employee.
- Mutuality of Obligations – A true contractor can terminate a contract, work with other clients, and move on from a contract once their project or work is complete. If your work with a client is ongoing or exclusive, you could fall under IR35 legislation.
Remember that none of these guidelines are absolute and no one rule guarantees you will be caught by IR35. Still, these indicators are important when determining your IR35 status.
What changes are coming in April 2020?
If you do fall under IR35 legislation and you work in the public sector, IR35 legislation already changed in 2017 to say that your end client is now responsible for determining your tax status, rather than you yourself.
In April 2020, these changes are being extended to the private sector too. The new rules state that all medium and large companies will be responsible for determining the tax status of their contractors and/or employees.
It’s important to be aware of these changes as you will no longer be in control of your IR35 status. If your end client decides you are within IR35 legislation, you could see as much as 25% deducted from your fees to cover income tax and NICs.
If you think IR35 might apply to you, make sure you’re in contact with your end client regarding your status so that you can disagree with or appeal their decision if necessary.
We hope that’s given you a helpful overview of IR35 and the new changes coming this year. The gov.uk website has more detailed guidance for off-payroll working for agencies and you can get help determining your tax status using their CEST online tool.
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