IR35 in 2022: what every contractor needs to know
That’s why we all need to stay up to speed with the latest IR35 news. But keeping up with IR35 is especially difficult right now.
IR35 reforms were introduced in 2021, but strict policing of the reforms were delayed by 12 months in what the government described as a “soft landing”. So, the way HMRC applies the rules is changing again in 2022.
This state of flux is confusing for everyone, so let’s introduce some clarity. In this article, we’ll provide a brief guide to what IR35 means for contractors, detail the 2021 reforms, and outline what contractors and their end-clients need to know about IR35 in 2022.
What is IR35?
In the UK government’s own words, IR35 exists to “make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same income tax and National Insurance contributions as employees.”
So, the purpose of the off-payroll working rules is to assess whether a contractor is genuine, rather than a disguised employee. The aim is to close the loophole that allowed contractors and freelancers to pay less tax by working like regular employees, but getting paid through an intermediary, such as a personal service company (PSC).
Are you inside or outside IR35?
“Inside IR35” means that you are considered a disguised employee of your end-client for tax purposes, and therefore subject to PAYE and National Insurance, paying the same rates of tax that an employee would.
“Outside IR35” means that you are considered self-employed, operating as a genuine business and therefore aren’t caught by the legislation.
What were the 2021 IR35 reforms?
The IR35 off-payroll reforms came into the public sector in April 2017 and finally rolled out to the private sector in 2021.
Previously, contractors had been responsible for determining their IR35 status, and the risk of non-compliance lay with them. Since the reforms, that responsibility lies with the business that is paying the contractor. However, that only applies to public sector entities subject to the freedom of information act, and private sector companies that meet two of the following criteria:
- Annual turnover of more than £10.2 million
- Balance sheet total of more than £5.1 million
- More than 50 employees
Businesses that do not meet these criteria are exempt from the changes, so a contractor working with a small business will still be responsible for determining their own employment status.
What is the “soft landing”?
When introducing the private sector IR35 reforms in April 2021, the government announced a 12 month soft landing period, whereby businesses wouldn’t be penalised financially for errors. During this period, businesses still owed tax, but HMRC were more relaxed about assessing statuses to give business owners a chance to get used to the new rules.
HMRC introduced a supportive, collaborative approach during that period, advising companies how best to avoid IR35 problems. However, with that transitional period ending on April 6th 2022, the rules and penalties will soon be in full force.
IR35 after April 2022
At Kingsbridge, we specialise in providing business insurance for freelancers and contractors. We understand the market better than most, and we predict “hard landings”, where HMRC won’t allow a grace period, to be the norm in the future.
HMRC claims it’s helpful to businesses, but their stated mission is to be “relentless in pursuing those who bend or break the rules.” So, we can all expect a return to HMRC doing things by the book regarding IR35 compliance.
Taxes are going up
National Insurance will increase by 1.25% for employees, employers, and the self-employed from April 2022. The dividend tax rate goes up by the same percentage simultaneously. As a result, contractors and end-clients who fall foul of IR35 have even more money to lose.
How can contractors stay IR35 compliant under the new rules?
In a recent survey, nearly two-thirds of contractors said they see IR35 reform as the biggest threat to their livelihood. Many companies that employ contractors seemed to have panicked when the reforms were announced, deciding that they were safer not hiring them if there was any doubt about their “outside IR35” status.
That situation is easing now. Companies realise that they still need contractors and freelancers, and there’s a shortage of skilled people in most industries.
The best advice for every freelancer or contractor in 2022 is to take control by double-checking your IR35 status.
And if you work or wish to work for larger companies, you may need to reassure them that they won’t be penalised for using your talents.
HMRC will encourage contractors and their clients to use its own CEST tool to determine IR35 status, but CEST has been criticised on multiple occasions. For example, HMRC recently decided that NHS Digital had been engaging contractors under the wrong interpretation of IR35, even though they did so based on answers provided by CEST. They found themselves paying an extra £4.3 million in back tax as a result.
That’s how unreliable CEST can be. So, what’s the alternative?
Get your IR35 assessment with Kingsbridge
To convince an organisation to hire you as a contractor, you’ll need to reassure them that your “outside IR35” status can withstand an HMRC assessment. The award-winning Kingsbridge tool helps you do precisely that. It’s the only IR35 solution for contractors that combines an automated review process with expert consultancy support.
Remember, too, that your IR35 status isn’t set in stone. It can change as contracts change. For that reason, it’s advisable to check your status regularly, using the Kingsbridge tool. If you take out Kingsbridge IR35 insurance cover, you can claim back legal fees and costs in the event of an HMRC investigation.
Crucially, the policy also gives you access to IR35 status reviews using the Kingsbridge Status Tool. This exclusive tool has been designed and built by some of the industry’s leading experts to give you confidence that your IR35 status is being assessed fairly and accurately.
Why not contact the Kingsbridge team to find out more?