What is IR35?
In the late 1990s, HMRC became increasingly aware of a tax loophole whereby a person could essentially carry out work in an Employee-Employer relationship without paying any tax through what is known as a Personal Service Company (PSC). This is simply a company where most of the work is performed by the shareholder/s.
In order to prevent this from happening, HMRC introduced the ‘Intermediaries Legislation’, more commonly known as IR35 (the number of the original press release announcing its creation!) in April 2000. The key question that the legislation revolves around is:
‘If the company (to which the worker belongs) didn’t exist, would the relationship between the end client and the worker be that of an employer and employee?’
If the answer is in the affirmative, then the IR35 rules will apply to that contract.
The legislation also states that all jobs must be considered on a contract-by-contract basis – so two contracts could involve the same parties but one may fall within the scope of IR35 legislation and the other may not.
Why have there been changes and what are they?
In recent years, HMRC have carried out a number of consultations and surveys on this area of taxation. In their findings, HMRC estimated that ‘only 10% of those who should be applying the rules do so, which will cost the Exchequer £1.3 billion in 2023/24’ and deemed this ‘unfair’.
Based on these findings HMRC introduced amendments to the legislation which took effect from 6 April 2021. Whereas previously the responsibility fell on the worker to determine the relationship, it is now up to the client - where they are a public authority or a medium to large-sized organisation* -to determine the relationship and ensure that the appropriate measures are being taken.
This applies to my business – what do I need to do?
You (as the client) must assess each contract and send the contractor a Status Declaration Statement outlining the decision and how this conclusion has been reached. The contractor can then raise a dispute with the client if they disagree.
In order to carry out this assessment, clients can use this tool provided by HMRC, or the downloadable flowchart here.
Once you have worked through the steps above, you will be told whether the contract falls inside or outside of the IR35 legislation. If it is outside, there won’t be any change to how the contract is treated.
If the contract is deemed to fall within the legislation, then the contractor is to be treated as though they are employed for tax purposes for this engagement. This does not mean that the client is responsible for the worker’s employment rights, but the client will need to deduct Income Tax and National Insurance before the contractor is paid and is then responsible for paying these to HMRC along with any Employer National Insurance Contributions due. The majority of payroll software does now have the option to include ‘off-payroll workers’ so that any liabilities due can be submitted to HMRC along with your PAYE submissions.
*Medium/Large sized organisation is any company that meets two of the following criteria:
• Turnover greater than £10.2m
• Total Assets greater than £5.1m
• Average number of employees greater than 50
In order to remain compliant with the IR35 legislation, all medium/large sized businesses must ensure they are carrying out the appropriate checks and treating any contracts where it does apply accordingly.
And remember - if you have any queries on IR35 legislation or are looking for any tax advice, contact our team on 024 7667 3160 and we’ll be more than willing to help.