About IR35/Off-Payroll Working Rules

If you are a Contractor, Agency or Hirer and require assistance with IR35 status determinations, we can help. Contact us today!

Brief History of IR35 (also known as the Off-Payroll Working Rules):

  • IR35 began in April 2000.
  • IR35 was reformed for the public sector from April 2017.
  • IR35 was reformed for the private sector with some changes to the public sector reform from April 2021.

Prior to the changes, since the advent of IR35 in April 2000 the responsibility for deciding if IR35 applies rested with the contractor.  This changed for those in the Public Sector in April 2017 and those working for medium or large UK clients in the private sector in April 2021.  The change basically meant that where a contractor is providing services to a public authority (defined by any public body subject to the Freedom of Information Act) or a medium or large UK private sector company then the IR35 decision is made by the engager – not the contractor.  If an inside IR35 assessment is made by the engager the “fee payer” – the client or usually the agency – has to deduct and account for the “deemed employment income” and pay over to HMRC the appropriate tax and NIC.

What is IR35?

IR35 (also known as the Off-Payroll Working Rules or the Intermediaries Legislation) is concerned with employment status (employed or self-employed) for tax and National Insurance purposes. At its most basic, it means that if a contractor provides his or her services to a third party (the hirer) through a limited company (an intermediary) then, a party in the chain must consider the IR35 status.

IR35 is concerned with the contractor’s relationship as an individual with the end client. This includes the contents of any written contracts and the actual working practices. To be inside IR35 means that this relationship is effectively one of disguised employment and employed levels of tax and NIC need to be accounted for. If the relationship is not disguised employment and is outside IR35, the contractor is free to account for its own tax and NIC on its income through its own company. The net result is that being inside IR35 usually costs a lot more!

What rules now apply?

Essentially the new rules are similar to those already in the public sector with end clients making the IR35 decision and fee payers responsible for making the deductions.  In brief these are as follows:

  • Affects medium and large businesses only – small companies remain exempt.
  • Small incorporated clients are defined as: Annual Turnover of not more than £10.2 million, Balance sheet total not more than £5.1 million and number of employees not more than 50.
  • Small unincorporated clients are defined as: Annual Turnover for a calendar year only of less than £10.2 million – no other tests.
  • Status determination statements (SDS) – legislation to enable the SDS and reasons for it to be passed down the supply chain and directly to the worker.
  • Client led status disagreement process to be set in legislation together with the need to take “reasonable care.”
  • Non-compliance in the supply chain – further guidance to be provided on the circumstances when HMRC will transfer liability up the chain. Seen as an encouragement to secure the compliance of the supply chain – more risk for end clients.
  • Fee- payer liable for secondary (employers) NIC.

What factors are considered when deciding IR35 status?

The main factors considered when deciding IR35 status are: the extent and degree of control exercised by the client over the worker, the worker’s right to engage helpers or substitutes, mutuality of obligations between the worker and the client, financial risk of the worker, provision of equipment, basis of payment of the worker, personal factors, the existence of employee rights, termination of the contract, whether the worker is part and parcel of the client’s organisation, exclusive services and mutual intention.

This list is not exhaustive and case law shows not to treat this as a checklist to run through mechanically. Instead they are the factors that go towards painting the picture whose overall effect must be evaluated.

Things to consider under the new rules:

Contractors

If you are working for a public authority or a medium or large private sector company, you will now be subject to a status determination by that party.  You have the right to appeal your determination if you do not agree with it.  See how we can help.

If you are working for a “small” or wholly overseas client, you continue to be responsible and liable for your own IR35 status as before.  Do not bury your head in the sand. With the large increases in HMRC IR35 investigations and the focus from Government and the public on “disguised employment” and tax avoidance it is only sensible to act now to make sure you know your IR35 status.

Some people are happy to spend their spare time deciphering court cases, arguing technical cases with HMRC and reading contracts. If this is you, then read no further as you now know the basics of IR35 and what it entails for you.

If you do not want to get so deeply involved in this complex subject but do want to relax and have peace of mind then you may wish to seek advice from your accountant or engage an IR35 specialist firm to help you to decide your IR35 status. See how we can help.

Agencies and end clients/hirers

Where applicable, you should be checking supply chains for compliance, which includes any arrangements involving third parties undertaking IR35 contract reviews and offering IR35 advice.  On the latter it is vital to ensure that such third parties are not Managed Service Company Providers, which in itself, would pose an enormous financial risk. For affected hirers, you should be assessing all off-payroll workers in accordance with the legislation. See how we can help.

Consultancies

Genuine outsourced services are outside the rules for both the public and private sectors and some consultancies working on genuine Statement of Work contracts (the basics are – where the supply is of services and not people and payment is not on a time and materials basis) are also outside the rules.  However, these arrangements need to be scrutinised to ensure this is the true situation and evidence of same sought and kept, including all the contracts in the chain.

Even if outside the rules on this basis it is likely (unless a small business) that the rules will still apply and the Consultancy effectively becomes the client, so will have to make the status decision.

All parties need to properly understand who they are dealing with and on exactly what contractual basis, as well as establishing the reality.  See how we can help.

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