Guidance

IR35 is legislation designed to combat tax avoidance and is enforced by HMRC. In a nutshell, it requires contractors who are treated the same as employees, to pay the same tax as employees.

Not at all, it was introduced in April 2000, for limited company contractors to comply with. Following an adjustment in 2017 for contractors in the public sector (whereby the public sector hirer took responsibility for ensuring compliance with IR35), changes in April 2021 were made to the private sector, whereby all end clients (except small businesses) are required to make the determinations and, with support from their recruitment partners, ensure appropriate income tax and National Insurance (NI) deductions are deducted at source.

For a business to qualify as small, the business must satisfy 2 of the following criteria:

1. A turnover of less than £10.2 million
2. The balance sheet total is less than £5.1 million
3. The business has fewer than 50 employees

The change in legislation does not ‘outlaw’ working through Personal Service Companies (PSC). Although there may be some turbulence as we adapt to the new legislation, ultimately, there is nothing to prevent engagement with independent consultants, provided they either operate as truly self-employed, or additional tax is paid on their services.

The assessment responsibility has moved from the PSC contractor to the end hirer (unless the hirer is a small business entity). Where the end hirer is not responsible for payment to the PSC, (for example where there is a recruitment business in the supply chain) the assessment outcome must be communicated to the fee payer (usually the recruiter) to ensure that the PSC receives the correct payment and deductions for PAYE and NIC’s are made, if the PSC is determined to be inside the scope of IR35.

The off-payroll working rules currently apply to any worker supplying their services through a PSC, public sector organisation or private sector organisation. The change to the legislation transfers the assessment responsibility to medium and large end hirers in the private sector. For small end hirers in the private sector the responsibility for assessment will remain with the PSC.

‘Inside IR35’ is a term which usually means that the contract and working practices of the engagement are consistent with a ‘disguised employment’ relationship and should therefore be subject to income tax and National Insurance deductions at source, similar to an employee.

‘Outside IR35’ means that the contract and working practices are consistent with an arm’s length, consultancy arrangement and not a ‘disguised employment’.

Assessment is based on a number of factors which have been built up via case law which include; supervision, direction and control, substitution, mutuality of obligation, financial risk and integration into organisation (amongst a few others). Within these categories, an accurate assessment will also consider (but is not exclusive to) tasking, length of engagement, absence procedures, provision of equipment, alongside a full review of the services being provided.