IR35 is legislation aimed at tackling ‘disguised employment’ whereby an individual worker provides services to an end client through an intermediary such as a personal service company (PSC).
Where IR35 applies, income tax and National Insurance contributions must be deducted from the sums earned by the worker as if he or she was employed by the end client. The worker is treated as an employee rather than self-employed for tax purposes.
The IR35 rules have been around since 2000, however, until 2017, when changes came into force affecting the public sector, they received minimal attention and achieved little to assuage the treasury’s concerns that the majority of PSCs and other intermediaries were not carrying out IR35 assessments or, where IR35 applied, paying tax and National Insurance contributions.
The changes which came into force in the public sector in 2017 shifted the responsibility for assessing whether IR35 applies from the intermediary to the end client. This led to many organisations adopting a cautious approach and determining that every worker engaged via a PSC was caught by IR35 and should be treated as ‘on-payroll’. A consequence was that many subcontractors ceased working in the public sector while remaining subcontractors accepted employment roles or increased their charges.
Following implementation having been delayed a year because of coronavirus, from 6 April 2021 the private sector will catch up with the public sector and the responsibility for assessing whether IR35 applies and, where it does, making deductions for tax and NICs, will move up the contractual chain.
The forthcoming changes create obligations for businesses engaging individuals through intermediaries which could have significant financial and other consequences. Adopting a blanket approach to IR35 risks reaching false conclusions which could lead to tax areas or unnecessary deductions from payments for services, potentially damaging working relationships. There is an exception to the new rules for small businesses, however, this does not mean than IR35 can be ignored, only that the responsibility for determining whether it applies remains with the PSC or intermediary which could find itself in trouble for not determining status or operating PAYE.
While IR35 may be aimed at determining status for tax purposes, the legal tests are similar to those which apply for determining status for employment law purposes. It is important for businesses to understand these tests in order to apply them correctly and avoid appeals. Although the government’s Check Employment Status for Tax (CEST) tool will help with decision making, it is not infallible. The HMRC guidance indicates that taking ‘reasonable care’, as the rules require, is likely to involve seeking the advice of a qualified, professional advisor.
The Employment Team at Jacksons Law Firm are used to advising clients on employment status and applying the same tests which are relevant for IR35 purposes. We can help your business carry out status determinations and conduct appeals or challenge decisions. Alternatively, if you are unsure whether IR35 will apply to you or your business, we can help you with this and with understanding what you and the other parties in your chain need to do before 6 April 2021.
Please see the following links to our recent article on IR35 along with a podcast recorded in November 2020 and a webinar which we will be holding on 3 March 2020.
Jacksons Blog – Deja vu but another chance to prepare
Jacksons Podcast – IR35 legislation – how will the changes effect you?
IR35 – How Employers and Contractors will be affected. FREE online event, Wednesday 3rd March 2021
For further details, please contact a member of our Employment Team.