A contractor’s guide to the IR35 legislation in 2022

As pretty much all contractors will know by now  – and if you don’t, where have you been? – the IR35 legislation changed in April last year, altering how IR35 is determined and who holds tax liability.

IR35 refers to the legislation that determines whether or not a contractor is genuinely self-employed. This was designed to clamp down on contractors who are essentially full-time employees, but are paid through their limited companies as contractors in order to reap lower tax rates than their employed counterparts, while their ‘clients’ enjoy lower overheads and no requirement for employers’ National Insurance contributions (NICs).

Prior to the changes you, as the contractor, were responsible for determining your IR35 status and you also held the tax liability. This meant you decided if IR35 applied to your contract without anyone else’s input. In some cases this is still the same but more on that later.

Since April 2021, it is the end client who is now responsible for determining your IR35 status. They assess your contract and working practices before issuing you with a Status Determination Statement (SDS) that declares you either inside or outside IR35. The tax liability, meanwhile, shifted to the fee payer.

If your end client pays your fees directly, then this means they hold the tax liability, although in many cases the fee payer means the recruitment agency.

What is the difference between inside IR35 and outside IR35?

Contactors hear the terms ‘inside’ and ‘outside IR35’ a lot. When your SDS deems you’re  inside IR35, it means that you are not considered self-employed for that particular engagement, based on the terms of your contract and your working practices. This means that the IR35 legislation does apply to you and that you are subject to paying income tax and NICs at source via PAYE at the same rates as employees.

However, it’s important to note that you are not eligible for the same benefits as employees, such as annual leave and sick pay.

If you are found to be outside IR35, it means that the IR35 legislation does not apply to you in this instance as you are considered genuinely self-employed. For this engagement, you will be taxed through self-assessment at the usual rates for the self-employed.

You should remember that IR35 is based on each engagement, so you could simultaneously be working two contracts for two end clients, and be inside IR35 for one and outside for the other. You can find out more on being inside and outside IR35 here.

When is a contractor still responsible for their IR35 status?

As we mentioned earlier, in some cases contractors are still responsible for determining their own IR35 status, and tax liability still sits with them where applicable. This is the case in the following situations:

• Your client is a small business: If your client is considered a small business then the changes to IR35 legislation do not apply to you as the changes only affect medium and large businesses. Your client is considered a small business if they satisfy at least two of the following criteria:
  • An annual turnover of no more than £10.2 million
  • No more than £5.1 million on their balance sheet
  • No more than an average of 50 employees during the tax year
• Your client is based overseas: If your client is based overseas and has no ties to the UK whatsoever, then you are responsible for your IR35 status. If your client has a UK branch (even a really small one) then the offshore branch is responsible for your SDS and your fee payer holds tax liability.
• You are working overseas: If you are a non-UK resident, then you do not have to consider IR35 at all.

We have gone into more detail on these exceptions on our blog.

What happens if a client doesn’t assess my IR35 status?

If your client should be assessing your IR35 status (i.e. none of the above exemptions apply) but they have not, you should contact them to remind them of their obligations. Until they have issued your SDS, the tax liability sits with them (regardless of whether or not they’re the fee payer) so it really is in their interest to get it organised sooner rather than later.

You could always prompt them into action by performing your own IR35 status review using a tool such as the Kingsbridge IR35 Status Tool. Find out more about what to do in this situation here.

Share your thoughts on IR35 in our survey

The Kingsbridge team are conducting a survey to gather the views of contractors on IR35 in 2022. We understand the reform may have caused you issues, but the more you can help us understand the contracting landscape as it currently stands, the better we can take care of you going forward.

As a thank you for your time, we will enter you into a prize draw to win a £250 Voucher Express e-Gift Card. Click here to take the survey.