IR35 & Employment Status – The What, Why & How!Musab Hemsi
IR35 – The What
The off-payroll working rules for individuals who provide personal services via an intermediary will change for large and medium-sized businesses in the private sector from 6 April 2021.
In a significant shift, these reforms will place the Employment Tax compliance burden on the agencies and companies that engage contractors who use Personal Service Companies (‘PSCs’), and are expected by many to increase operating costs and compliance risks.
The off payroll working rules, commonly referred to as IR35 after HMRC’s press release that announced their introduction, have a straightforward aim. The rules are intended to prevent individuals from reducing income tax and National Insurance Contribution (‘NIC’) liabilities, through what HMRC considers to be “disguised employment”, where an individual provides their services via a PSC, receiving payment in the form of dividends.
However, in certain circumstances determining whether the IR35 rules apply can be challenging.
This article summarises how the IR35 regime currently operates, and the challenges surrounding those rules. It then discusses the reforms which will take effect in the private sector from April 2021.
To put this in context, we begin with a brief survey of the history of IR35 and recent developments.
IR35 – The Why
The off payroll working rules were introduced in April 2000. Under this regime, where IR35 applies, the fees received by the worker’s PSC from the contracting company, are deemed to be employment income. On that basis, the PSC is responsible for operating PAYE/NIC on those fees.
Over the years, a significant practical challenge for HMRC in enforcing the legislation has been the requirement to police the thousands of PSCs responsible for applying the regime.
The Government’s concern that this resulted in widespread non-compliance, and an apparent growth in the use of PSCs, led to HMRC launching a consultation in July 2015 on how to make the regime more effective.
This was followed by a detailed consultation on public sector reforms in 2016. In summary, this resulted in agencies and bodies which engage contractors in the public sector – rather than the PSCs – becoming responsible for applying IR35 from April 2017.
However, the Government remained concerned that the regime was not working effectively in the private sector, with an estimate that only 10% of PSCs that should be applying the IR35 rules were actually doing so. HM Treasury also estimated that without further action, the annual cost to the Exchequer would reach £1.3 billion by 2023/24.
Following a further consultation, at the 2018 Budget it was announced that, in essence, the 2017 public sector reforms would be extended to the private sector from April 2020. Due to Covid-19, this was then postponed for 12 months, meaning the reforms will take effect from April 2021.
The New Regime – 6 April 2021 – How to Comply
From 6 April 2021, responsibility for determining whether an engagement falls within the IR35 regime will move from the worker’s PSC to large or medium-sized businesses in the private sector. This includes cases where the PSC is engaged via an agency.
Where an employment relationship is deemed to exist for IR35 purposes, the entity paying the PSC will be responsible for operating PAYE and NIC on payments made. This may be the business using the services of the contractor, or otherwise, where the end user instead contracts via an agency, then the agency will be responsible for operating PAYE and NIC based on the end user’s determination as to whether IR35 applies.
Where contractors are engaged by a ‘small’ business, responsibility for IR35 compliance will remain with the PSC. The definitions of “small”, “medium” and “large” businesses for the purpose of these measures has yet to be determined, however the Government has indicated that it intends to use similar criteria to those found in Companies Act 2006. This suggests that a ‘small’ business would be one that satisfies at least two of the following conditions in the relevant years:
- Turnover of not more than £10.2 million.
- Aggregate assets on the balance sheet of not more than £5.1 million; and
- Not more than 50 employees.
Join LexLeyton and IR35 compliance and solution specialists Colnort on Wednesday 23 September 2020 at 11am when we will be sharing our legal and practical insights to enable your business to plan it’s strategy for compliance with the proposed IR35 reform into the private sector