Are sole traders affected by IR35?

On a Solo Mission...How does IR35 Affect Sole Traders?

The simple answer is that IR35 does not affect sole traders. The IR35 legislation applies only to incorporated businesses and therefore a sole trader cannot be caught by IR35. There is however a big but, because although IR35 doesn’t apply to sole traders, employment status does, and the rules for determining employment status are very similar to the rules for determining IR35 status.

With limited company contractors, generally any liability will typically fall to the personal service company (PSC) - unless the end client is a public sector organisation, and bearing in mind the changes that will apply to IR35 in the private sector from April 2021.

On the contrary, a sole trader will not carry any liability for their own employment status.

There are many ways in which a sole trader can be hired by a client. ​The client organisation will be responsible for paying the additional taxes, interest and possibly penalties should a sole trader be considered to be an employee. Whilst the sole trader does not carry any liability, they would of course suffer a deduction on their future earnings, as the likelihood is that they would have to be placed onto the payroll of the end client.

For sole traders operating through an agency, specific legislation applies, known as Agency Legislation or Onshore Employment Intermediaries Legislation.

Whilst the agency legislation has been in existence for a long time, it was revised in April 2016 as it was considered by the Government that many workers were operating on a self-employed basis, when they were in fact disguised employees. One of the main reasons for this was that agencies could rely on a ‘bogus’ right of substitution.

The legislation was revised to narrow the focus of the legislation solely on supervision, direction and control (SDC). If any SDC was exercised by the end client over the services, then the agency would have to place the worker on their payroll and pay the appropriate tax and NICs.

Many organisations, end clients and agencies alike will have taken the decision not to engage sole traders, due the risk this presents in terms of the tax liability, and many sole traders may have been persuaded to set up a limited company in order to obtain work.  Limited companies have therefore increased in popularity, not necessarily because it was favoured by the worker, but upon the insistence of an engager.

 Qdos provide competitive insurance policies for sole traders as well as limited company contractors - get a quote or call 0116 2690999 today.

By:Kate Cox

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