--- description: Find out what is IR35, what it means for UK businesses, as well as their contractors and freelancers from April 2020. image: https://gdm-localsites-assets-gfprod.imgix.net/images/capterra/og_logo-e5a8c001ed0bd1bb922639230fcea71a.png?auto=format%2Cenhance%2Ccompress title: What is IR35 and is your SME business ready for it? --- # What is IR35 and is your business ready for it? Canonical: https://www.capterra.co.uk/blog/1212/what-is-ir35-and-is-your-business-ready-for-it Published on 16/01/2020 | Written by Sonia Navarrete. ![What is IR35 and is your business ready for it?](https://images.ctfassets.net/63bmaubptoky/uSX_rzYS2Ot6LoXvrRI4TUS5Pk8E3H4Fof1du_AZs90/0655e14a7477b8788a16402559e52592/IR35.jpg) > The original IR35 legislation came into force in 2000 and was aimed at reducing tax avoidance – specifically “disguised employment”. This refers to individuals working full-time for organisations, but billing the company as an independent contractor, rather than being paid through payroll. Taking their “salary” as dividends from a limited company means they pay no National Insurance and a reduced rate of income tax compared to pay-as-you-earn (PAYE) employees. It also means the client company pays less National Insurance. ----- ## Article Content In April 2020, the rules governing who counts as an employee (IR35) are changing. Find out what is IR35, what it means for UK businesses, as well as their contractors and freelancers.What is IR35?The original IR35 legislation came into force in 2000 and was aimed at reducing tax avoidance – specifically “disguised employment”. This refers to individuals working full-time for organisations, but billing the company as an independent contractor, rather than being paid through payroll. Taking their “salary” as dividends from a limited company means they pay no National Insurance and a reduced rate of income tax compared to pay-as-you-earn (PAYE) employees. It also means the client company pays less National Insurance.Naturally, this scenario is beneficial for the businesses and contractors, but HMRC misses out on significant tax revenues, particularly as the contractors that often use this arrangement are in the well-paid finance, consulting, technology, and media sectors.How is IR35 changing?IR35 (the name comes from the original Inland Revenue press release in 2000) has been reformed several times. In April 2020 the regulations governing when off-payroll working rules (the “official” name for IR35) apply are getting tougher.Prior to 6 April 2020, it has been the responsibility of the party providing a service to determine the status of a worker’s employment for each contract. In practical terms, this usually means that contractors, working through a limited company with one director, decide in their own favour. Now, the company hiring the worker must decide.Who do the new rules affect?Public sector organisations must already decide whether a contractor should really be working for them as an on-payroll employee. From 6th April this year, many private companies – including charities – will have to do the same. The changes apply if an organisation meets two or more of the following three criteria:an annual turnover of more than £10.2 milliona balance sheet total of more than £5.1 millionmore than 50 employeesCurrent contractors must also take note of the changes, as they may affect their employment and tax arrangements. Some contractors work through third-party intermediaries, such as employment agencies, in which case the intermediaries must also be aware.You can find more detailed information about which companies fall under the new legislation on the Gov.uk website.What companies need to knowFor every contract with a worker – including through an agency – affected companies will need to decide on that person’s employment status for tax. HMRC provides a useful online tool to help determine this. You must bear in mind:The worker’s responsibilitiesThe degree of autonomy they have in the work they do, as well as where, how, and when they do itThe worker’s payment arrangementsWhether the engagement includes any corporate benefits or reimbursement for expensesAfter you’ve made a decision, you’ll need to inform the worker (and, if required, the intermediary agency) and keep a record of the decision and the evidence you used to make it. You’ll also need to have in place procedures to handle disputes about employment status. If a worker does dispute your decision, you must respond within 45 days. Failure to do so will result in that worker’s tax and National Employment contributions becoming your responsibility.How to manage new employeesIf the reform has its intended effect, some freelance contractors will become employees. This means you may be adding new workers to your workforce, increasing your National Insurance contributions and bringing challenges for your human resources and finance teams who will have to incorporate new people into your company’s systems and structures. You may also face tough negotiations from existing contractors who will seek higher rates under PAYE to make up for the increased tax they’ll be paying on their income.One way to ease the transition is with payroll software, which automates salaries, wages, bonuses and deductions. Organisations use it as a cost-effective alternative to outsourcing their payroll function. Payroll products can also integrate with popular accounting, HR, and business management software, too.You can find more than 300 payroll software packages on our website, with thousands of ratings and reviews from other businesses, as well as links to download and buy. ## About the author ### Sonia Navarrete Sonia is a Senior Content Analyst at Capterra, helping SMEs choose the best software. She published in Raconteur, Computer Weekly and IT Pro. 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