Contractors’ Questions: Who pays IR35 tax, now and from April 2021?

Contractor’s Question: Being new to freelance IT work I’d like to know – who pays IR35 tax currently, and who’s going to pay IR35 tax from April this year?

Expert’s Answer: Let’s break my answer down into three parts.

What is IR35 Tax?

Firstly, there is no such thing as ‘IR35 Tax.’ What we have is the off-payroll working rules, commonly referred to as IR35 and when a contractor is within scope of these rules – referred to as ‘Inside IR35’ – the contract income they receive must be treated as employment income and taxed as if they were an employee.

Whereas a contractor who is deemed to be outside the scope of these rules – ‘Outside IR35’ - can choose to withdraw their income in a more tax-efficient way, using a combination of salary and dividends.

Broadly-speaking, a contractor who is inside IR35 could see their take-home pay reduce by approximately 10-20%. This differential is what some describe as 'IR35 Tax.'

Who pays today?

The rules are not new. Since 2000, contractors providing their services to clients via an intermediary, typically their own limited company, have been required to assess their working relationship with their client and determine their employment status for tax. For engagements assessed as inside IR35, the contractor would be required calculate and pay the additional tax and National Insurance contributions due.

HMRC have for years considered there to be widespread non-compliance among contractors, with many incorrectly assessing themselves as outside IR35.

In 2017, the off-payroll working rules were amended for contractors providing their services to public sector organisations. Crucially, the responsibility for making the assessment shifted from the contractor to the end-hiring organisation. For those considered to be inside IR35, the organisation paying the contractor would now be required to calculate and deduct the additional taxes due. The contractor had little or no say in the outcome.

However, contractors providing their services to the private sector could continue to make their own assessments.

Who pays from April 6th 2021?

With HMRC claiming the public sector changes made in 2017 were a success, the off-payroll working rules are to be amended once more.

With effect from Tuesday April 6th 2021, the off-payroll working rules will now be extended to include all but the smallest of companies in the private sector.

Unless covered by the ‘small company’ exemption, any contractor providing their services through an intermediary to a medium or large UK-based organisation, must now have their employment status for tax assessed by their hiring organisation. 

Inevitably this will lead to more engagements being deemed as inside IR35, with many contractors bearing the additional cost.

The expert was Chris Mattingly, chief executive of IR35 Navigator.