Confused by IR35? Read our simple breakdown…
The new off-payroll working rules (commonly known as IR35) are changing, and these changes will take effect from 6th April 2020, so if you run a business using associates and contractors this WILL affect you. And, perhaps more importantly, this will affect various departmental budgets in relation to staffing - or even legal - costs.
And if you are a contractor with a personal service company (PSC) i.e. limited company, this WILL affect you too. You’ll need to understand how the legislation works and apply best practice to ensure it doesn’t apply to you - which basically means that you will need to meet HMRC’s definition of self-employment.
Failing to meet the definition will mean no more claiming business costs against tax bills, avoiding full national insurance payments, or paying yourself a lower wage to then top up with dividends.
In a nutshell, if IR35 applies, the liability to operate PAYE & NICs will fall onto the fee-payer, rather than the person or PSC providing the worker.
Read on as we provide a simple breakdown to the somewhat confusing tax rule that is IR35...
Introduction - What is IR35?
IR35, also known as the Intermediaries Legislation, was the number of the press release which announced the introduction of anti-avoidance legislation back in April 2000 - when it originally came into effect.
Before the days of IR35, the most common way of operating as a contractor was as a self-employed individual. But in the late 1980s HMRC introduced a new rule - making any recruitment company engaging self-employed workers liable for any unpaid tax if they failed to deduct full PAYE prior to payment to the contractor.
From then on, recruitment companies began refusing to work directly with contractors. Why? Because they saw both the potential for risk and cost to be too vast. This in-turn forced contractors to set themselves up through their own limited companies, as this meant the recruitment company could hire the contractor without holding any liability for unpaid taxes.
This new way of working became increasingly popular amongst contractors, particularly as it presented additional opportunities for them to maximise their returns. As a result, HMRC saw a dramatic fall in their tax take from the market, and in an attempt to counter the avoidance of tax & NICs, IR35 was born.
When does IR35 apply?
This depends on the answer to a hypothetical question: if the limited company did not exist, would the relationship between the end client and the worker be that of employer and employee? If the relationship between the end client and the worker would be that of employer and employee, then IR35 applies to that contract. However, if the relationship between the end client and the worker would be that of self-employment, then IR35 does not apply to that contract.
How does IR35 work right now?
Currently, in the private sector, the PSC decides for itself whether IR35 applies.
If IR35 applies, the PSC is responsible for applying PAYE & NICs to the ‘deemed direct payments’ received under the contract including the liability for employer’s NICs.
The ‘deemed direct payment’ is effectively a minimum salary that must be processed by the PSC – which prevents the shareholder extracting the money in the form of dividends.
Why the need for change?
It is estimated by HMRC that only 10% of individuals working in this way apply the rules properly, costing the Exchequer hundreds of millions of pounds in lost tax revenues every year.
In the meantime, the cost of non-compliance with the off-payroll working rules in the private sector is growing and will reach £1.3 billion a year by 2023/24.
Therefore, the government want to take action by implementing new rules to address this issue and to secure funds that could otherwise be spent on vital public services.
Are you inside or outside of IR35?
If you are found to fall inside IR35, you are expected to pay the same amount of tax and national insurance that a permanent employee would pay. Within the public sector, the agency or hiring body will deduct national insurance and income tax from your pay each month.
If you are working outside IR35, and operating legitimately as a contractor being paid by your limited company and doing so outside of the IR35 rules, this means, you are responsible for ensuring you pay the right amount of national insurance and tax on the money that you receive for your work.
What happens if you don’t comply?
HMRC are working to ensure that there is no advantage for clients who engage contractors through intermediaries/PSCs and who do not comply with the new rules. So for those organisations and individuals who are non-compliant, there will be risks of fines and large tax bills.
Is your business ready for IR35?
If you don't feel ready for IR35, why not take an more in-depth look at IR35? Simply register for our tax webinar IR35: Changes for the Private Sector from April 2020 and listen to tax expert Martin Jackson as he discusses the pivotal points of IR35.