The legislation changes related to IR35 will came into effect on the 6th of April 2021 for small and medium-sized companies in the private sector. The underlying purpose of the legislation is to tackle limited-service companies that are avoiding taxes from contractors. It’s practically the opposite of what HMRC states in its business guidelines concerning employees and employers.

Under the new IR35 legislation, private sector companies that engage contractors shall be solely responsible for figuring out whether or not the rules must apply when it comes to the deduction of income tax or national insurance.

Whether or not your business meets this criterion, the new rules aim to establish which company is and isn’t within reach of IR35. Here are some fundamental new IR35 details you should be aware of:

Who Needs to Brace for the Impact the Most?

In fact, the HMRC estimates that the new legislation will impact more than 170,000 taxpayers who operate via a PSC. Furthermore, this effect will reach over 60,000 companies that use contractors through PSCs and additional 20,000 third-party recruitment agencies.

The New Rules of the Game

When it comes to the consideration of contracting, take into account a few combined factors to identify whether or not you need to function as self-employed or an employee.

Clause of Substitutions

Contractors who perform services via a limited company and aim to stay outside of IR35 must make sure a proper substitution right throughout their contract. In fact, if you want to remain outside of IR35, you will have to prove to HMRC an equal competence through your efforts and ensure that individuals can also carry out the responsibilities with the same standard.

Mutual Obligation

Employers and employees need to agree to sign binding mutual contracts that make it compulsory for the employers to pay the employees for their hard work. However, there’s no continuing obligation for employers and employees. Remember, mutual obligation also applies to self-employment status. However, self-employed individuals will have to prove beforehand.

Allowance of Expenses

Apart from verification and review of employment status, there’s allowance of expenses. It means contractors who perform services under new IR35 legislation laws in the private-sector via a PSC can claim up to 5% of annual income for various administrative expenses.

Administrative costs involve on-premise support, indemnity insurance, accountancy advice, training, printing, stationery, bank interest, and computer equipment.

Preparation Options

Contractors who perform services within new IR35 legislation likely underpay their taxes. Therefore, the responsibility lies on your shoulders to figure out if you have to comply with the updated off-payroll regulations. And if you fall under IR35, decide whether or not it would be good for you to gain a permanent employee status.

Conclusion: What does it Mean for Enterprises?

As the implementation of new legislative rules of IR35 takes place in the private sector, companies are aware of the shortage of time to prepare thoroughly. Nonetheless, people who are responsible for redesigning their entire talent hunt or sourcing strategy will need to get ready for alternate engagement methods. The idea is to inherently position better in the market, avoid high labour costs, and attract the most talented individuals.

We can help with all of your business and personal tax and financial planning needs. For a strategic review of your finances, please contact us.

Disclaimer: We don’t take any responsibility for actions taken based on above information. Please speak to our consultants if you need more information. This guide was written specifically for Smart Accounting clients. Some of the information contained in this guide might not be applicable if you do not have a business managed by Smart Accounting. By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details are correct at time of writing.


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