What to Know About IR35 When Hiring Contractors

If you’re a business that hires contractors, navigating the ins and outs of IR35 can feel a little daunting - especially with the recent legislation changes that came through in April 2021. Businesses now have way more responsibility to determine the employment status of everyone who works for them, and understandably, this increases the risk of getting things wrong.

In this article, we’ll discuss what you need to know about IR35 legislation when hiring contractors. We’ll cover what the legislation is, who it affects, how to determine it, and the risks to be wary of. We’ll also share how we at Talenthub are helping our business clients navigate IR35 in their hiring practices.

What is IR35?

Firstly, what exactly is IR35, and why is it such a big deal? IR35 is legislation all to do with off-payroll workers and was brought in to protect against tax avoidance. It was first brought in 2000 but has seen major updates in 2017 and 2021.

IR35 was designed to weed out ‘disguised employees’ - off-payroll workers treated like full-time employees (think benefits, sick pay) but paying lower tax rates than self-employed contractors have access to. It’s all an effort to make sure that everyone is paying the right amount of tax. It has been estimated that this legislation affects around 1% of the entire UK workforce.

IR35 legislation affects both public and private sector businesses that meet certain turnover and employee-size thresholds. More details about these can be found here.

What Does Inside and Outside IR35 Mean?

You may have heard the terms ‘inside’ and ‘outside’ IR35 being used. But what exactly do these mean? They both refer to whether a contractor meets  HRMC’s definition of a self-employed contractor. If you’re ‘inside’ IR35, you don’t meet these requirements; if you’re ‘outside’, you do.

These requirements are based on three rules. These are: 

1. Right of Substitution

2. Mutuality of Obligations (OOO)

3. Control

It’s important to note that IR35 is not the same as PAYE. Whether you’re inside or outside IR35, you’re still an off-payroll worker/contractor. 

What are IR35 Risks When Hiring Contractors?

The latest update to IR35 back in 2021 really shook things up for clients hiring contractors. Clients (employers), not contractors, are now responsible for determining employment status. This brings an increased level of risk to clients, as they’ll be faced with consequences if they get it wrong.

So what happens if you get IR35 wrong? Firstly, there’s an increased risk in triggering an HMRC IR35 investigation. And if found in breach of regulations, penalties may be issued.

How TalentHub is Helping Employers Navigate IR35

We’re working with one of the UK’s leading recruitment lawyers, Lawspeed. They specialise in employment and recruitment legislation and have created (and continue to update) contracts for all parties involved, from the client to the person working and even umbrella companies when they are utilised.

We’re also working with a leading finance company, Sonovate, which manages all IR35-compliant payments. Thus, the end users (our clients) are unaffected, as we are up to date with all the latest legalities and fully compliant with the IR35 changes implemented in April 2021.

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