IR35 employment status – who is responsible?
IR35 is tax legislation introduced in April 2000 to counter what HMRC class as disguised employment. As a contractor, your ‘IR35 status’ effectively determines your tax position with HMRC.
Contractors who are treated as being truly independent from their client may be entitled to advantageous tax treatment which reflects the business risks that they are undertaking. However, those contractors whose assignments contain evidence of ‘employment indicators’ are likely to be viewed as disguised employees, and as such they should have PAYE tax and National Insurance Contributions (“NIC”) deducted at source, much in the same way as an employee’s income would be treated.
Prior to the introduction of IR35 an individual could avoid both being taxed as an employee and paying Class 1 NIC by providing services through an intermediary (e.g. a personal service company). The individual could take the income generated from providing its services out of the intermediary in the form of dividends, rather than a salary, resulting in significant tax savings.
The IR35 legislation ensures that individuals working through their own limited company account for the correct levels of tax and NIC. Where a relationship between an individual and their client would have been one of employment but for the intermediary, IR35 ensures that the income generated from the services provided are treated on a basis broadly equal to that of an employee for tax purposes.
WHO IS RESPONSIBLE FOR IR35 COMPLIANCE?
If the end-client is a public-sector body then the responsibility for deciding the IR35 status of an assignment falls with the organisation responsible for paying the intermediary (usually the public-sector organisation or the agency), in line with the off-payroll rules introduced in April 2017.
Whilst there were no immediate changes to the policing of IR35 within the private sector a consultation was held by the Government on how to tackle non-compliance, which allowed for speculation that the off-payroll rules would eventually be rolled out to the private sector too.
It has since been confirmed within the Autumn Budget of October 2018 that the off-payroll rules will apply to the private sector, and that these changes will come in to force as of April 2020. Whilst there are finer details to be produced between now and April 2020, broadly speaking the responsibility for IR35 compliance will rest with the organisation responsible for paying the intermediary (the end-hirer or the agency). Some exceptions apply where the end-hirer is a ‘small organisation’, and it is expected that such exceptions will be clarified within the draft legislation as suggested above.
Currently, it remains the responsibility of individual limited companies (up until April 2020) to ensure that their IR35 status is clear, and it is our advice that taking dividends in the absence of careful consideration of the IR35 position of an assignment places those companies and their directors at risk. However, we urge end-hirers and recruitment businesses to be proactive by utilising the time afforded by the Government to prepare for the changes ahead and ensure that they have a clear position in relation to the IR35 position of their off-payroll workers.
The only way to be sure that the appropriate tax treatment is being applied to the income of limited company contractors is to have their assignments reviewed by a specialist. Brookson Legal Services offers a trusted IR35 assessment service, drawing on 18 years of employment status experience to provide you with the most accurate advice and support in relation to IR35 compliance.
Find out what it means for your contractors to be inside or outside of IR35.