The IR35 ‘off payroll’ rules will be extended to the private sector from 6th April 2020 onwards. What exactly does this mean, and what can contractors do to prepare in advance for these legislation changes?

Current Legislation

The Intermediaries Legislation (IR35) was introduced by HMRC in 2000. The aim of the legislation is to remove the tax advantages of providing services via a limited company for individuals who are technically ‘disguised employees’ – people whose working practices are more similar to those of a traditional employee.

The rules only apply to “relevant engagements” – where an individual provides services to a client through an intermediary (a limited company) and, but for the existence of the intermediary, the income would be treated as that of an employee if the individual had contracted directly with the client.

The intention of the legislation is that, apart from specified deductions, all money received by the intermediary in respect of relevant engagements should be treated as paid to the individual in a form subject to income tax and Class 1 National Insurance. In effect, dividend payments and many business expenses are not allowed if you are caught by the IR35 rules.

Are you Caught by IR35?

For each engagement, the question is whether the contract is in the nature of employment as far as the individual is concerned. Tests applied to determine whether an individual is employed or self-employed are used. The three main tests are:

Control

A worker will not be an employee unless there is a right to exercise control over the worker. This may be a right to control what work is done, where or when it is done, or, how it is done. Actual control is not paramount; it is the right of control that is important.

The right to get a substitute or helper to do the job

Personal service is an essential element of an employment contract. A person who has the freedom to choose whether to do the job himself or hire somebody else to do it for him, or provide substantial help, is probably self-employed.

Mutuality of obligation

Within a contract there are various mutual obligations – the obligation to perform and be paid for performing would form part of any contract – but the mutual obligations needed for a contract of employment to exist consist of more than this, there needs to be obligation to offer and an obligation to accept future work.

Effects

Where there is IR35 income it will be deemed to be salary subject to PAYE and NI in the tax year to 5 April. Failure to correctly account for PAYE and NI can result in significant penalties and interest.

The intermediary (company) will be allowed to deduct certain expenses in respect of IR35 income specifically:

  • Expenses deductible as an employee
  • Company contributions to approved pension schemes
  • Employers National Insurance
  • A flat rate of 5% of the gross income from relevant engagements

April 2017 Changes 

New ‘off payroll’ rules were implemented in April 2017 for contractors working for public sector organisations. Instead of contractors themselves being responsible for determining their IR35 status, this obligation has been handed to the engager of each contractor.

Where a contractor is deemed to be ‘inside’ IR35, the client must deduct employees’ National Insurance Contributions and income tax from the contractor’s pay, as well as paying employers’ contributions. Therefore, the contractor will essentially be deemed as an employee.

April 2020 Changes

At the 2018 Budget, the Chancellor announced that the IR35 ‘off payroll’ rules will be extended to most private sector businesses from April 2020. Therefore, these businesses will be responsible for determining contractors IR35 status and will be responsible for deducting PAYE and NIC if the contactor falls into the IR35 rules.

Small organisations (of 50 individuals or less) will be exempt from these rules.

How to prepare for the IR35 rule changes

Don’t delay preparation: Taking the time to prepare sooner rather than later means your organisation need not necessarily change the way it utilises interim procurement workers. This will ensure your organisation is able to access and compete for the temporary skills you need to support and deliver successful projects.

Undertake a risk assessment: Audit your interim workforce to ascertain your level of risk. A recruitment expert who has supported the public sector through the original implementation date can undertake a health check to determine how IR35 changes may affect your organisation and help develop a solution if required.

Consider your long-term strategy: Think about how you will assess and arrive at a determination for each assignment and maintain control and visibility over how contractors are on-boarded and utilised. If your contingent workforce spend is small, then a recruiting expert with experience supporting public sector organisations can help your organisation meet its obligations

If you have any queries regarding IR35 do not hesitate to contact Amy, our Tax Manager on amy@hbaccountants.co.uk