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IR35 – an explainer

Community
Community
31st March 2021

IR3rule changes will come into force in the private sector on 6th April, just a few days from now.  

IR35 is the name sometimes used to describe the UK’s off payroll working rules. These are the rules that apply to contractors, people who work through an intermediary to provide services to a client.  

For example, a large banking company might hire an IT contractor to support them with a new software delivery for 6 months. Rather than being an employee of the bank themselves, the contractor will work through an intermediary. The bank hires the intermediary to provide the contractor’s services.   

The intermediary is usually the contractor’s own personal services company (or limited company), although there are a few other options.  So, in our example, the bank might hire Tom Plc to provide Tom’s IT project management services.  

Under the government’s rules, contractors may be “inside IR35” or “outside IR35”. If they are inside the rules, they must pay more income tax and national insurance contributions as if they were an employee. This is because the government argues that a person in this situation would have been an employee, if they were providing their services directly to the client company, rather than through an intermediary.  

Off payroll working rules aren’t new. The rules were brought in back in 1999. The aim of these rules was to prevent “false” self-employment. The government was worried that companies might hire someone to do the same job as an employeewithout a fair share of tax and national insurance being paid 

What’s changed now, is who is responsible for deciding whether someone falls into the IR35 rules or not. Before the IR35 rules change this April, contractors themselves were responsible for determining whether the way they worked fell inside or outside of IR35. However, come April, it is the client (sometimes known as an engager) who has to decide whether the contractors they use fall within the rules or not. This applies to all medium and large private sector businesses, although small businesses are excluded. The rules have already changed in the public sectorback in 2017.  

The consequences for contractors of being inside IR35 are quite dramatic. Because of the increased tax burden that an individual could face, they might reduce their take home pay by 20%.   

Many companies will not want to go to the effort of determining their contractors’ status or take on the risk of having got it wrong. Consequently, many are simply putting a blanket stop on the hiring of contractors or forcing everyone inside IR35We have some sympathy for engaging companies in this position: the tests for being inside IR35 are complicated and subjective.  The tool provided by HMRC to make determinations, CEST, is unreliable, and cannot determine a contractor’s status in almost 1 in 6 cases. But it’s not fair on those who are genuinely self-employed who will lose out if CEST or their employer gets it wrong.    

This rule change is bad for flexibility, something that the UK economy sorely needs in the wake of the covid-19 pandemic. Contractors are typically highly skilled individuals who provide their services and expertise for companies for short to medium periods of time. This flexibility is important for innovation, something sorely needed in this country. It was right to delay the changes for a year back in 2020, but the crisis is not over, and increasing the burden on businesses and self-employed workers at this time is a mistake.  

Furthermore, the IR35 rule change is inherently unfair. Although contractors do often pay less tax than employees, they also get significantly fewer benefits. As a self-employed worker, contractors are not entitled to paid holiday, paid maternity, paternity or parental leave, sick leave or notice periods. Many people in this position see higher wages and less tax as the trade-off for riskier more insecure work with fewer benefits, and insurance against crises that employees would have more protections against. 

A damning House of Lords report in April 2020 highlighted the injustice faced by workers placed inside IR35, “zero rights employees”, taxed like an employee, but receiving no employment rights whatsoever. 

At Community, we believe that many such rights should be extended to all workers, including the self-employed. We believe that certain rights, such as sick pay which gives you the ability to feed your family if you are sick, should be a baseline that everyone is entitled to.  

But in the meantime, whilst these rights are not universal, it is particularly unfair to increase the tax burden on these contractors without them having any protections in return.  


If you are a member of Community and need help or advice, please contact us at servicecentre@community-tu.org or on 0800 389 6332.

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