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What the new IR35 tax rules mean for the self-employed

Saleha Riaz
·3-min read
File photo dated 11/01/18 of a view of signage for HM Revenue & Customs (HMRC) in Westminster, London. More than �3.1 million has been spent by the Treasury, the City watchdog and HMRC on making their offices Covid-19 secure for staff, new figures have revealed. Issue date: Monday January 18, 2021.
Nearly one in four contractors said in February that their clients were either uncertain or had made no indication of what they would do in response to the IR35 changes. Photo: Getty Images

Changes to IR35 self-employed taxation rules that come into effect this week are meant to clamp down on contractors who work through limited companies for tax purposes, and increase the amount the government receives from income tax and national insurance contribution.

Until now, if a contractor provided services to a client through a business in the public sector, the client would decide the employment status. If the business was in the private sector, it would be the one deciding the status.

But from Tuesday, all public sector clients (companies or organisations that hire freelancers and contractors) and medium or large-sized private sector clients will be responsible for deciding their workers’ employment status.

If these new “off-payroll working rules” apply to a contractor, their fees will be subject to income tax and national insurance contributions.

If a worker provides services to a public sector client, or a medium or large-sized private sector client, they should get an employment status determination from the client, as well as the reasons behind that determination, the HM Revenue & Customs has said.

Contractors will be able to dispute the determination given to them if they disagree with it.

The client will have 45 days from the date of receiving the disagreement to respond. During that time the fee-payer should continue to apply the rules in line with the client’s original determination.

READ MORE: MPs slam HMRC for tax system 'quirks' leading to abuse and Brits missing out on relief

According to inews, “the government has said this will not affect people who work as genuine freelancers. Instead, it is targeted largely at contractors who set up a Personal Service Company (PSC), and use that for their business.”

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The changes were meant to come into effect last year but were postponed due to the pandemic “to help businesses and individuals deal with the economic impact of coronavirus,” the government said.

However, the Association of Independent Professionals and the Self-Employed (IPSE) has said that the changes “are undermining the sector at the worst possible time.”

IPSE research has shown that half (50%) of freelancers are planning to stop contracting in the UK after the changes, unless they can get contracts unaffected by them.

They are planning to seek contracts abroad (24%), stop working altogether (12%), seek an employed role (17%) or retire within the next year (11%).

Nearly one in four contractors (24%) said in February that their clients were either uncertain or had made no indication of what they would do in response to the IR35 changes.

A quarter (24%) said that their clients were planning to blanket-assess all their contractors as ‘inside IR35’ and one-fifth (21%) will only engage contractors working through umbrella companies. 

Nearly one in 10 contractors (8%) even said their clients were planning to cease engaging contractors altogether.

Andy Chamberlain, IPSE's director of policy, said: “The changes to IR35 would do serious harm to the self-employed sector at the best of times, but now they are adding drastic, unnecessary damage to the financial carnage of the pandemic – undermining the UK’s contractors at the worst possible time."

He said the IR35 is extremely complex, and the changes "are shifting this complexity from contractors themselves onto their clients. The result is clear: chaos."

“We continue to urge government to rethink the changes... IR35 is not an isolated problem: it is a marker of a tax system that was not built with the self-employed in mind. It is this that has to change – to make IR35 redundant and finally make taxation fairer and simpler for the self-employed," he added.

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