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Complete guide to IR35 for contractors

Updated: May 23, 2023

Whether you are new to the world of contracting or have years of experience behind you, every contractor will have heard of IR35.


Changes were announced to IR35 legislation by former Chancellor Kwarteng in October of this year, only to be reversed by new Chancellor Jeremy Hunt just weeks later. Inevitably, many contractors will now be wondering where they stand regarding IR35.


To help contractors understand how the legislation impacts them, Umbrella Search has put together this handy guide outlining everything you need to know about IR35 going into 2023.


IR35 explained


Firstly let’s take a look at what IR35 is.


IR35 is a piece of legislation introduced in 2000 to stop workers such as the self-employed, freelancers, and contractors from working as 'disguised employees.' In other words, IR35 was designed to prevent individuals from claiming to be self-employed and enjoying the tax benefits but who work more like an employee would to ensure that workers are paying the correct tax levels.


When IR35 was first brought in, it was the contractor's responsibility to determine and declare their IR35 status. However, this changed for contractors working in the public sector in 2017 when it became the client's responsibility, not the contractor's, to determine IR35 status. This was because HMRC considered that too many companies were not IR35 compliant. This was then rolled out in the private sector in 2021.


Since such changes were introduced, many contractors have had their IR35 status wrongly determined. This has meant that many have paid more than they should in PAYE tax and National Insurance.


What’s more, although these contractors have paid tax as if they were employees rather than self-employed workers, they have not been granted the benefits of being employed, such as statutory sick pay, holiday pay, maternity/paternity leave, or a workplace pension. Understandably this has naturally left many discontented and out of pocket.


Have IR35 rules recently changed?


In the so-called mini-budget announced by former Chancellor Kwasi Kwarteng, welcome changes to IR35 were proposed.


Notably, Kwarteng announced that contractors would regain control of determining their IR35 status rather than the end client.


This was considered a welcome relief to contractors UK-wide and was set to effect in April 2023.


These proposed reforms were designed to stop contractors from being wrongly classified under IR35. This meant that contractors would pay the correct tax levels and wouldn't be subject to lengthy, expensive, and stressful IR35 investigations.


However, to the disappointment of contractors, new Chancellor Jeremy Hunt, appointed on the 14th of October 2022, swiftly announced that such changes would not go ahead.


In his statement, Hunt stated that Kwarteng's proposed changes to IR35 would cost the UK economy £2 billion each year until 2026/7. In an attempt to reduce the government's debt, he stated that the reforms would not go ahead.



When does IR35 apply to contractors?


As changes to IR35 will not go ahead, all contractors must know when IR35 applies to avoid getting caught out.


There are specific criteria to look out for to determine a contractor's IR35 status, including:


Contractor’s working hours


Their working pattern is one test of whether a worker is a contractor and not operating as an employee. No specific pattern or hours must be outlined in the contract to prove the contractor is free to come and go as they wish.


Who’s in control?


Another test controls. When determining IR35 status, the client's level of control over the contractor and how they carry out the contract will be closely assessed. It should be clear that the contractor has been hired to take on a specific task or project and that the client cannot move the contractor from job to job.


Substitution


If the contractor cannot carry out the contract at hand, they must be able to send in someone else to do it for them.


Mutuality of obligation


Finally, the contractor must be able to refuse work from the client, something that an employee is unable to do. The contract must also state that the contractor is free to take on other work or projects simultaneously, meaning there is no exclusivity clause.


How can contractors avoid IR35?


That’s what to look out for when it comes to IR35, so how can you avoid getting caught out?


The great news is that an easy way to do so is by using an umbrella company.


As an umbrella company employs the contractor, they become automatically exempt from IR35. This means that the contractor can avoid the hassle of IR35 altogether and doesn’t face the threat of coming under investigation.


As well as offering the benefit of allowing the contractor to forget about IR35, they also provide contractors a range of other benefits. For example, becoming the contractor's employee means the contractor becomes eligible for statutory benefits, including holiday pay, sick pay, maternity/paternity pay, and a workplace pension.


Working through an umbrella company also means that the contractor's PAYE tax and National Insurance contributions are calculated and paid on their behalf, avoiding any tricky tax calculations.


The umbrella company also takes care of the paperwork and admin required of contractors, including filing expenses and invoicing, saving the contractor more of their precious time.


If you've decided that working through an umbrella company is the best move for you in 2023, Umbrella Search is here to help you find the best umbrella company.


Let Umbrella Search help.


Ready to take the first steps to find an umbrella company that's the perfect fit for your contracting needs? Get in touch with Umbrella Search’s friendly team for a quote today, and we will get back to you as soon as possible.



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