The rules for off payroll working, commonly referred to as ‘IR35’, were originally introduced in April 2000 and most readers will be aware that they refer to the legislation which prevents individuals from providing their services via an ‘intermediary’, such as a personal service company, and consequently paying less tax and NI than if they were employed directly.
HMRC introduced new measures from 6 April 2017 for those working in the public sector in order to tighten up these procedures, shifting the responsibility for deciding whether an employment relationship exists from the individual’s personal service company to the public sector body engaging them. Where the rules apply the end user will deduct PAYE and NIC in similar way to employees.
From 6 April 2020 HMRC are extending these rules to the private sector for all except small businesses.
Under the new rules, hiring organisations and end clients will have to determine whether IR35 should apply to their engagements with contractors. Where IR35 is deemed to apply, individuals operating through a personal service company may well find tax and national insurance (NI) will be deducted at source from payments made to them. The responsibility for deducting the tax and NI falls upon the fee payer, which might be the client or might be an agency in the supply chain.
If the end user is a small business however then they are not affected by the rules and the responsibility for IR35 remains with the contractor. A small business is classified as one which satisfies two out of the following criteria:
- Turnover of £10.2 million or less
- Balance sheet total of £5.1 million or less
- Less than 50 employees.
Determining IR35 status is not a straightforward process, and broadly requires the end user to assess whether the contract they have with an individual via an intermediary is more akin to an employment or a self-employment relationship. This will require clients to understand whether the contractor or worker is in business on their own account, which may involve knowing about the contractor’s other engagements, details which they may not be willing to share.
HMRC do offer an online tool which can be used to determine their view of the employment status of a worker. HMRC have stated they will stand by the result of the online tool unless a compliance check finds the information used to arrive at the opinion is incorrect. The tool is designed to be used by contractors, employers and agents, but ultimately it is for the engaging party to decide whether off-payroll working rules should apply or not, and some find it is not always applicable to their individual circumstances. The Employment Status Service tool can be found at www.gov.uk/guidance/check-employment-status-for-tax.
Contracts between clients and their workers should be carefully reviewed in preparation for the changes so that all parties are aware of their status and obligations prior to April 2020. It is possible, as was seen when the rules were introduced in the public sector, that some large businesses may cease to use a personal service company altogether or instead blanket treat all such engagements as falling under the IR35 rules.
Under the new rules a worker will be able to challenge a status determination if they believe it to be wrong so the client making the determination will need to have processes in place for dealing with such disagreements.
The application of IR35 has been complex since its introduction in April 2000, and continues to remain so. If you would like more information on how the legislation applies, or how the new rules may affect you, please contact our Tax Director, Jenny Marks.
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