As of April 2021, businesses with operations in the United Kingdom should be prepared for updated IR35 legislation which will impact hiring, status, and taxation of independent contractors.
What is IR35?
IR35 stands for Inland Revenue budget press release number 35. Now officially named as the ‘Off–payroll working rules’, it has been around since 1999 but gaining strength throughout the years. It is the UK’s anti-avoidance tax legislation designed to tackle ‘disguised’ employment. This can be compared to the worker misclassification laws in the US.
What is changing?
Historically, it has been the independent contractor’s (IC) responsibility to assess their own tax status, and this is what is changing this coming April.
The responsibility to assess the independent contractors tax status will shift to you, the end-client.
This is because the UK government estimated that the cost of non-compliance with tax rules by ICs in the private sector is growing and could reach GBP 1.3 billion (USD 1.8 billion) a year by 2023/24. By placing the burden on end-clients, the tax authority expects compliance to increase significantly.
This means that before the start of an assignment, you, the end-client will have to assess the IC’s employment status for tax purposes and issue a ‘status determination statement’ to the IC (and the agency paying the IC) to let them know of your decision.
What if an IC is ‘in scope’ of IR35?
If after an assessment an IC is deemed ‘in scope’ of IR35, that means that you cannot engage them as an independent contractor and they are deemed as ’employed’ for tax purposes. An alternative option would be to engage the professional as a ‘worker’. In the UK, you can distinguish personal services providers under three different categories: self-employed, worker and employee. Workers get some employment rights but not all. Workers are free to accept or reject any offer of work made to them. It is a common type of arrangement for temporary roles or positions that require flexibility in terms of termination. IR35 does not apply to workers as they already have their income taxes and social contributions deducted from their pay as if they were employees.
The main factor that distinguishes a worker from an employee is:
The worker has the right to reject any work at will, and without penalty, and the main factor that distinguishes a worker from a self-employed person is that a worker can be subject to supervision, direction, and control by the end-client.
Looking for help navigating this change?
There’s no question, adapting to this change will feel complicated and tedious, however, there are experts out there to help you. An alternative to dealing with classification is to hire individuals through an Employer of Record (EOR), where the status as employees is clear. The experts at iWorkGlobal have been engaging talent through their EOR solution since 2011, and have extensive experience getting workers onboarded quickly and compliantly. In addition to iWorkGlobal hiring and onboarding your talent, all payroll, benefits, and all HR-related paperwork would be taken care of as well. Ready to learn how the process works? Get started, here!
More of a visual learner? Check out our 1-minute video that explains exactly how an EOR can help your business.