What is IR35? All you need to know in 2019

Since April 2000, the Intermediaries Legislation - more commonly referred to as IR35 - has been used by HM Revenue and Customs (HMRC) to combat tax avoidance by so-called "disguised employees". The legislation has often proved controversial, but will see its reach extended from April 2020.

But what exactly is IR35 and who does it affect? And what will happen following the 2020 reforms? Read on to find out more.

IR35: a definition

IR35 targets contract workers who use an intermediary such as a limited company to provide services to clients, when in reality they would be classed as an employee if the intermediary was not in place. Such workers are referred to by HMRC as "disguised employees".

If they are found to be "inside IR35", that is, deemed to be disguised employees, these workers must pay the same income tax and national insurance contributions as if they were employed. However, this can cost as much as a quarter of their net income.

Who is affected by IR35?

If, as a contractor or freelancer working through an intermediary, your responsibilities are the same as a traditional employee, you are adjudged to be inside IR35. If you need further clarification, HMRC has developed an online employment status tool for temporary workers unsure of their liability under IR35. However, self-employed workers and IR35 experts have argued that the tool frequently produces inaccurate results. Indeed, research from Qdos - the IR35 insurance specialist - suggests that 85% of contractors do not trust it.

For a more detailed explanation of the Intermediaries Legislation, read our guide on 'Public Sector Recruitment: the impact of IR35'.

Changes to the IR35 rules

The legislation saw a significant update in 2017, and further change is afoot in 2020 as the government continues to crack down on perceived tax avoidance through intermediaries. 

April 2017 reforms

From April 2017, the responsibility for establishing whether a temporary worker is inside IR35 transferred from the individual contractor to the end client. 

Incorrectly labelling a disguised employee as being outside IR35 can result in hefty fines for the client, increasing the risk attached to hiring contractors. As a result, some public bodies - including HMRC itself, have since stopped using limited company contractors.

Private sector rollout

After much speculation, it was announced in the 2018 budget that IR35 would be extended to the private sector from April 2020, with the exception of small organisations. The definition of a 'small organisation' will probably be similar to that of the Companies Act 2006, under which medium and large organisations fulfil two of the following criteria:

• Net turnover exceeding £10.2m
• Balance sheet totalling more than £5.1m
• More than 50 employees

Draft legislation is yet to be published, but the reform is expected to impact most private sector contractors, the majority of whom work for large clients. The measure is predicted to net the Treasury an additional £1.3bn per year from 2023.

What to expect from the new IR35 rules

The private sector rollout could lead to a loss of earnings for private sector limited company contractors who suddenly find themselves inside IR35. And as we gear up for the reforms to take effect, the spectre of Brexit has prompted some large organisations to relocate to the continent, bringing more people, including contractors, into the job market.

However, it is important to remember that contractors will still be sought after, and paid a premium for their services compared to regular employees. The 2020 reforms will not sound a death knell for contracting.