IR35 Explained Plainly for Small Businesses

If you hire a limited company for a worker who acts like an employee, who is responsible for checking? As of 6 April 2021, that changes in the private sector.

That is IR35, also called Off-Payroll Working. I am by no means an expert, but here is what it is.

What is IR35?

The IR stands for the Inland Revenue, as HMRC was known then. IR35 was a press release issued by the Inland Revenue in 1999 about tax avoidance, and it became law in 2000.

At first it was about the public sector. That is usually organisations owned and run by the government to provide services for its citizens.

Basically, it is about a worker who would normally count as an employee, and so would pay income tax and National Insurance. To avoid those taxes, this worker might set themselves up as a (limited) company, called the "intermediary". They pay less tax by taking dividends, while doing the same work for an employer (the client). This is considered tax avoidance.

Inside and outside

If you are deemed guilty of tax avoidance under IR35, that is called being "Inside IR35". You pay all the relevant backdated income tax and National Insurance, and most likely a fine. But you do not get the same rights as an employee: no sick pay, no holiday pay, no pension scheme and so on.

If you are deemed "Outside IR35", none of this applies.

Who checks?

In the public sector, the client is responsible for checking the status of anyone they hire.

In the private sector, it was mostly the limited company's job to decide whether a new contract was inside or outside IR35. As of 6 April 2021, the responsibility shifts to the client who pays the company or worker.

The 5 questions

These are the main criteria for working out whether you are inside or outside:

• Does the client decide what you do, how you do it and where you do it, or do you?
• Do you have to do the work yourself, or can you send a substitute?
• Is your client obliged to offer you work, and are you obliged to accept it?
• Do you carry financial risk, and are you liable for any mistakes you make?
• Do you have or use your own equipment?

These are looked at for each individual client you have. There are other criteria that might come into play, and it seems quite complicated.

There is an online test to check your IR35 status, or anyone you hire: the gov.uk employment status check.

If you hire a limited company

If you use the services of a limited company, it is now up to you to check whether IR35 applies to that worker. Please proceed with caution.

If you are not sure, ask for professional help. There are companies who specialise in this field and can help.

If there is anything I can do to help you with this new regulation (keeping in mind I am by no means an expert), please get in touch.

Today, I would go through the five questions for one worker or contract and write down your answers.

As always, keep it simple and... Flourish and Prosper

Lisa