A quick and easy guide to IR35 and what it means for interims and independent contractors.
What is IR35?
IR35 refers to tax legislation that HMRC created in response to self-employed workers operating via personal service companies (PSC) or other similar intermediaries. The legislation was first created in 2000 and was to ensure that interims operating via a PSC were paying the appropriate level of tax. In particular, HMRC wanted to ensure that off payroll workers were paying tax on the full amount they were being paid if they were deemed to be a ‘disguised employee’. In short, if it wasn’t for the intermediary vehicle then that individual would be sat on the organisation’s payroll and HMRC would be collecting income tax and national insurance contributions (both employee and employer).
The definition of being ‘inside IR35’ and ‘outside IR35’ has always been very vague, but there were some guidelines from HMRC that suggested that if you were under supervision, direction, or control then you were deemed inside IR35 and should be paying tax on the gross amount of pay.
Ensuring compliance with HMRC tax policies has always been the responsibility of the company Director and they are held accountable for ensuring that the PSC is operating legally and not avoiding tax.
What are the changes you should be aware of?
In April 2017, HMRC changed how IR35 would be enforced within the public sector and whose responsibility it was for determining IR35 status and any subsequent necessary tax deductions. Whilst the definition of what was ‘inside’ and what was ‘outside’ hadn’t changed, the way it would be enforced shifted dramatically for those operating as interims and consultants within the public sector.
The new legislation means that it is now the responsibility for the ‘public body’ and ‘end client’ to determine the IR35 status of the role. To help in this determination, HMRC created an online tool which would ask a series of questions that lead to a guideline answer. A link to this tool is below:
Depending on how the questions are answered, a different series of follow-up questions will be asked that should lead to an accurate determination.
If a role was determined to be outside IR35 then it was agreed that the individual operating through a PSC was truly providing a service and not deemed a ‘disguised employee’. In this instance, the previous regime of payment would apply and it was down to the company Director to ensure they were compliant with tax legislation within the company.
If the role was deemed to be inside IR35 then employment taxes would need to be applied the gross amount of pay at source.
Whose responsibility is it for doing this? In the new HMRC legislation, it is the ‘fee payers’ responsibility to ensure the appropriate taxes are deducted and they are held financially responsible for doing so by HMRC.
Who is the ‘fee payer’? The fee payer is deemed to be the closest individual/organisation in the chain to the ‘worker’. So, if the ‘worker’ is engaged directly with the end ‘client’ then it is their responsibility. If the worked is engaged via an ‘employment agency’ then it is the employment agency’s responsibility.
In the diagram below, the orange box denotes the responsible party for ensuring the appropriate tax is deducted when a role is deemed inside IR35 by the end user:
What does it mean for you?
Changes to IR35 legislation have had a sizeable impact on the public sector interim market, and there are a number of things that need to be taken into consideration when setting up as an interim or accepting work as an interim within the public sector.
Where you are deemed to be inside IR35, you should ensure you fully understand the implications on take home pay and that you are accepting work that is financially viable for you to deliver. If you are deemed to be inside IR35 then you will have a range of payment options that will vary depending on how you are being engaged by the end client:
- If you are going direct with the end client then it is likely you will be on their payroll and normal employment taxes will be deducted at source.
- If you are going via an employment agency then you will normally have the option of payment via an umbrella company, or via ‘deemed direct payment’ into your ltd company.
In both the scenarios above you will need to account for expenses being deducted from the net amount and to ensure you understand what tax relief can be applied on expenses. We would strongly advise that you seek advice from a specialist tax accountant or IR35 specialist accountancy firm.
When will this move into the private sector?
Whilst this legislation is currently only applied into the public sector (not including charities and housing associations) the latest budget announcement from the Chancellor suggested it would also be applied to the private sector. The exact date for implementation is not known but it is expected to come into force from April 2020 and will be announced in the Autumn statement.
Other sources of information
HMRC IR35 guidelines www.gov.uk/guidance/ir35-find-out-if-it-applies
Employment Status test for tax https://www.tax.service.gov.uk/check-employment-status-for-tax/about-you
Contractor Weekly www.contractorweekly.com/ir35/what-is-ir35/
Total Jobs www.totaljobs.com/advice/ir35-explained
We hope the above is useful and provides access to a range of information. If you have any questions then please get in touch with us to discuss. Whilst we cannot provide any financial advice we are happy to answer your questions. Please click here to book a time.