IR35 – A Brief History
In 1999, HMRC (or the Inland Revenue as it was known then) issued Press Release IR35 which outlined the Government’s plans to clamp down on the growing use of one-man-band limited companies set up to provide their services to clients. In many cases employees were laid off on a Friday, only to be re-contracted via their Personal Service Company the following Monday performing exactly the same role. After a consultation period, the rules to counter alleged tax avoidance via the use of these Personal Service Companies became law in 2000 and remain in place today.
What are the ‘IR35’ Rules?
Basically the ‘IR35’ rules state that the contractor’s Personal Service Company needs to decide whether or not the contractor is performing the same function as an ordinary employee of the End-Hirer’s business. If this is the case, then the contractor is deemed to be a ‘disguised’ employee and so the Personal Service Company must make tax and National Insurance deductions under PAYE as a normal employee, including the payment of any additional employer costs that may be due. However, where the Personal Service company decides that the contractor is not a ‘disguised’ employee, the contractor is free to use any method in which to receive payments from their Personal Service Company. The most common method is for the contractor to be paid a mix of a minimal salary and dividends, which can bring tax advantages.
What’s the problem with this?
HMRC has estimated that 95% of contractors earning via Personal Service Companies are not complying with the IR35 rules. This meant that they believe that the Exchequer is being deprived of tax revenue. The main problem that HMRC had however was one of enforcement; the chances of a small Personal Services Company being investigated and brought to tax tribunal were so low that the vast majority simply ignored the IR35 rules and decided that they were ‘outside’ IR35. The reasons for this were twofold; firstly the sheer number of cases that HMRC would have to first make determinations on and then likely to take to tribunal made this task almost impossible, and secondly in the vast majority of cases, even if HMRC were successful the amounts of tax owed would have not likely covered the costs in taking this course of action.
What was HMRC’s solution?
From April 2017, if a contractor wished to be paid through their Personal Service Company whilst working for an End-Hirer who was in the public sector, the responsibility of determining if that job role was caught by the IR35 rules was changed so that the End-Hirer was responsible for making that determination. If the role was deemed to be ‘inside IR35’, the fee-payer (i.e. the entity that made payment to the Personal Service Company, such as the recruitment agency or End-Hirer themselves) had to make what is known as a ‘deemed salary payment’ and deduct tax and National Insurance as if the contractor was a normal employee. What is more, the fee-payer also had to account for the additional employer costs, such as Employer’s National Insurance, the Apprenticeship Levy and the Employer’s auto-enrolment pension contributions, if necessary.
So how does this affect me?
Although these new rules previously only applied to contractors working in the Public Sector, from April 2020 HMRC will also apply these rules to some companies in the Private Sector. This means that a contractor working for any medium or large sized company, the responsibility for determining whether you are caught by the IR35 rules will be down to the End-Hirer, i.e. the company you are working for. If they decide that your job role is within the IR35 rules, then whoever makes payment to your Personal Service Company will need to make a ‘deemed salary payment’ and deduct tax and National Insurance, as well as accounting for any additional Employer Costs.
What if I disagree?
There may be occasions where the End-Hirer could get the status determination wrong. To help them make this decision, HMRC have provided an online tool called the ‘Check Employment Status Tool’ (‘CEST’), however even this guide is not fool proof; cases have appeared in the news lately which HMRC have lost despite their ‘CEST’ tool determining that the role was inside IR35. To help overcome this, HMRC have said in their recent consultation that they intend to provide an appeal mechanism but have not yet laid out any details as to how this would work.
Why will this affect me?
Following discussions between Technical Resources and the End-Hirer, it is almost certain that the job you do will be considered to be inside IR35. This means that from next April, even if nothing else changes, Technical Resources will need to make tax and National Insurance deductions by law – if we do not, we could be hit by severe penalties as well as having to pay any unpaid tax and National Insurance. In addition, unless you are engaged on a new contract, Technical Resources will also need to pay across all additional employer costs to HMRC on top of what is paid to you.
Will I still be able to use my Personal Services Company?
In a word – yes, however you will need to bear in mind that the income you receive from Technical Resources will be taxed as if you are our employee, but without the benefits of being an employee (such as sick pay, holiday entitlement etc.). In addition, you will still need to ensure that you have the correct Public Liability insurances and will still have other expenses that come with running a Personal Service Company, such as accountancy fees, filing fees etc. Also, you will no longer be able to claim mileage expenses each week (although you can make a claim at the end of the tax year) and will lose any benefit of being VAT registered.
Is there an alternative?
Yes, by signing up with one of our Partner Umbrella companies - TJW Contract Solutions or Liquid Friday.
Our recommended Umbrella companies provide you with all the benefits of permanent employment, such as sick pay, maternity/paternity pay, holiday pay and protection under the National Minimum/Living Wage and Agency Workers Regulations, but still gives you the flexibility of enabling you to go from job to job. You don’t need to worry about calculating income tax and national insurance contributions, all this is done for you by the Umbrella company.
You can find more information on TJW Contract Solutions or Liquid Friday here:
Should you have any further questions please email our team at IR35@tecres.uk.com and they will assist you with any questions you may have.
For any more information, please visit the HMRC website by clicking the link below: