IR35 tax legislation is nothing new. In fact the legislation was introduced in 2000 in order to identify ‘disguised employees’ in businesses.

IR35 rules ensure that off-payroll and on-payroll workers are taxed fairly. This means that if a contractor is working under exactly the same conditions as an employee (effectively a ‘disguised employee’), IR35 regulations ensure that the contractor pays the same tax and national insurance as an employee would.

The difference that came into force since April 2021, is who will make the IR35 determination. At the past, contractors themselves were responsible for determining whether or not they are working inside or outside IR35 rules. After April, this determination will be made by the end client (i.e. the receiver of services). The outcome and reasons behind the determination will need to be documented and communicated to the contractor prior to the work commencing. Liability for collecting the correct amount of tax and national insurance will then lie with the fee-payer, which could be the end client or a recruitment agency if one is involved in the supply chain.

The IR35 reforms won’t apply to all businesses. Small businesses are currently exempt from the changes, as are sole traders and PAYE agency workers. It will however affect medium and large-sized businesses that engage with self-employed contractors operating under a Personal Service Company. 

There are four main factors that will determine IR35 status:

1. Mutuality of Obligation
2. Substitution
3. Supervision and Control
4. Part and Parcel

These will define whether an off-payroll worker is inside or outside IR35. By considering how a contractor works in your business, you can determine whether they are in fact treated like an employee and therefore should be taxed as such.