IR35 - An Overview
- AuthorLeanne Day
IR35 and the off-payroll working reform initially came into force in 2017 for public sector organisations.
However, on 6th April 2020 the new IR35 rules will come into force, affecting medium/large private sector organisations. Although often perfectly legitimate, sometimes individuals set up an intermediary business and work for a Client on a self-employed basis rather than directly as an employee on a Contract of Employment. Where this is done as a means of tax avoidance however, the new rules are intended to put an end to this.
Some key terms to note when considering the IR35 rules include:
Employee: an individual working under a Contract of Employment and who has tax and National Insurance Contributions (NICs)deducted from their pay.
Disguised or Deemed Employee:
a worker who is not paying income tax and NICs as they are working through an intermediary, but who would otherwise be classed as an employee.
Client: the company/organisation who has hired the contractor via an intermediary.
Intermediary: the company between the worker and the Client, usually a contractor's own personal service business, partnership or managed service company.
Inside IR35: where a worker is found to be an employee of the Client and is thus liable for income tax and NICs.
Outside IR35: where a contractor is not seen as being an employee of the Client and therefore is not liable for income tax and NICs.
What is the purpose of IR35 and when will it apply?
The new intermediaries legislation is designed to ensure that workers who are not genuinely deemed to be self-employed will now pay roughly the same tax and NICs to HMRC as they would have had they been employed directly by the Client.
The Regulations apply if the following three conditions are met:
- An individual performs work personally for a Client;
- The services are provided under an arrangement involving an intermediary; and,
- The circumstances are such that if the arrangements had been made directly
between an individual and a Client, the individual would have been regarded as employed by the Client.
HMRC may carry out an IR35 enquiry to determine whether there is a disguised employee and if the rules therefore apply. They will not be so concerned with any written contract, but instead will examine the nature of the working relationship to determine whether, on the balance of probabilities, IR35 applies. They will look into issues such as the right of control from the Client, the mutuality of obligation between the parties, the right of the contractor to send a substitute worker, the financial risk involved and the parties' intentions. If HMRC concludes that the agreement is of an employment nature, it is likely to fall inside IR35. If however the contract relates to business services, it will fall outside IR35.
HMRC announced recently that they are changing the way IR35 will operate to provide businesses with more time to prepare. The rules will therefore now only apply to payments made for services provided from 6th April 2020. They were previously intended to apply to any payments made regardless of when the services were undertaken.
The current rules stipulate that the onus is on contractors who carry out work for private sector Clients via an intermediary to decide the employment status of each contract. However, from April this responsibility will fall to the Client who must make a determination with regard to an individual's tax status and, if necessary, deduct tax and NICs. This shift in responsibility, together with the employment rights and benefits that come with employee status, are likely to have an impact on the way Clients engage with intermediary businesses.
There are penalties and sanctions for failing to comply with the new IR35 rules. Those found to fall inside IR35 must pay income tax and NICs due as well as interest. If it is found that reasonable care was not taken to ensure compliance, a penalty may also be imposed. It is therefore extremely important for medium and large private sector businesses to take time to consider and fully understand the new intermediaries' legislation.
Interpreting the new rules and determining whether you fall inside IR35 is a complex matter. Our expert team are on hand to provide you with the help and advice you need to ensure you are compliant with the Regulations.
If you have any questions please contact our Employment Team