Update: Following 2018's Autumn Budget, it was announced that IR35 rules would be introduced for contractors working with medium and large-sized clients in the private sector. For an up-to-date article on IR35, please read IR35: where are we now.
Starting from 6th April 2017 there have been some changes to the way that IR35 is determined for contractors working in the public sector.
What is IR35?
IR35 (also known as ‘intermediaries legislation’) is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name.
The aim of IR35 is to determine if a contractor is a ‘disguised employee’. This means a contractor who takes a position with a customer, but doesn't pay the corresponding income tax and National Insurance contributions (NIC) that a normal employee would.
What has changed?
Previously, it was up to the contractor to determine if they fell under IR35. This has changed for contractors working in the public sector, for example, locum doctors attached to NHS hospitals. As of 6th April 2017, the entity that pays the contractor (which could be an agency) is now responsible for determining whether IR35 applies, rather than the individual contractors who carry out the work.
How to check if IR35 applies to you
If you are a contractor, you and your client can check if IR35 applies to you using HMRC’s online service. This service doesn’t store any of the information that you enter, so you can check your IR35 status anonymously. Remember though, if you are working in the public sector it is now your client who will officially decide your IR35 status.
What will happen if your client decides that IR35 does apply to you?
If a client decides that IR35 does apply to you, then they will have to deduct income tax and National Insurance from your invoices before paying the difference over to you.
Although you will be taxed the same as an employee, you will not be automatically eligible for the benefits and rights that actual employees receive, such as sick and holiday pay.
There are penalties for a client not following IR35 rules, including interest and penalties on any extra tax and National Insurance contributions that are owed. Penalties can be more severe if it is proved that IR35 rules or legislation have been deliberately ignored. HMRC has more information online about what to do if IR35 applies.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.