What is IR35?
In most professions, it’s not uncommon for businesses to outsource certain tasks or services to external suppliers.
From a tax and accounting perspective, it’s a process that’s always been relatively straightforward. However, things have become more complex as a result of IR35, which was first implemented almost 20 years ago.
IR35 is the reference term given to a specific area of tax legislation which also now gets referred to as the ‘off-payroll working rules’
Why was it introduced?
IR35 guidance was introduced by the Government in 2000 to help prevent contractors, or ‘disguised employees’ fraudulently claiming to be contractors to gain tax and National Insurance Contributions (NICs) advantages.
It is possible for contractors who do not comply with the rules to pay significantly less income tax and NIC than an equivalent employee. HMRC currently estimates that the cost of non-compliance could reach £1.3 billion a year by 2023/24.
Who does it apply to and when does it apply?
IR35 applies to contractors who work through their own limited companies. These tend to be Personal Service Companies (PSC’s). IR35 does not apply to self-employed individuals.
All ‘relevant engagements’ in which a contractor provides services to a client through a limited company are governed by IR35. If the work that’s being carried out is considered as being the same as if the contractor were employed by the client, then IR35 is likely to apply.
If IR35 does apply, what does this mean for employers and contractors?
- Employers – are responsible for paying Employer’s NICs and paying across to HMRC all PAYE tax and NIC deductions made from contractor payments.
- Contractors – should expect to be taxed like a normal employee, with Employee’s NICs and Income Tax deducted from their pay. Significant changes took place from 6th April 2017 whereby the vast majority of limited company contractors working for public sector clients became “deemed employees” of the public sector body or engaging agency. As at 6th April 2017 the public sector body became responsible for deciding whether or not IR35 applied. Where it did then PAYE tax and NIC was automatically deducted from payments made to the contractors by the public body or engaging agency.
In the 2018 Budget, it was announced that legislation relevant to IR35 would be amended further to extend the guidance relating to the public sector into parts of the private sector by April 2020.
This would mean that, from 6 April 2020, all medium and large businesses will be responsible for deciding whether IR35 applies to the contractors who work for them. Where it is determined that the rules do apply, the business, agency, or third party that pays a contractor’s company will need to deduct income tax and employee NICs and pay employer NICs.
Does IR35 apply to me?
While IR35 may have been in existence for many years, it is not always 100 per cent clear for contractors or clients to clarify if it applies to them or not.
Some contractors who are clearly governed by IR35 have found working under an umbrella company to be the most effective and compliant route however, this doesn’t mean it’s the best option for everybody.
HMRC has developed an online checking facility to help contractors check their employment status (the CEST) and, don’t forget, it’s also possible to seek guidance and advice from your accountant. Here at Ormerod Rutter, we have a dedicated tax specialist, Anthony Middleton, who monitors all of our clients’ tax investigations and deals with Corporation Tax, Income Tax enquiries and IR35 queries.
For more information about IR35 or guidance on whether or not your work is governed by it or not, contact us on 01905 777600