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.
What does this mean for us?
Although these new rules previously only applied to contractors working in the Public Sector, from April 2021 HMRC will also apply these rules to medium and large companies in the Private Sector. This means that for all contractors working for your medium or large company, whether you contract with them directly or use a recruitment agency, the responsibility for determining whether your subcontractor is caught by the IR35 rules will be down to you. You will need to make a Status Determination for every assignment for every contractor – you will not be allowed to make a ‘blanket’ assessment for any role. Whatever the result of the determination you will need to provide the contractor with detailed reasons for your findings, which could be subject to an appeal challenge. In any event, any assessment result must be provided to all parties in the supply chain to ensure that each party is clear on their responsibilities.
Small Company exemption
The off-Payroll rules will not apply where the end user client is a small company, as defined in the companies act 2006
What happens next?
In order to ensure compliance with the legislation, there are 3 key steps that you will need to take between now and 6th April 2021:
- Make an assessment of all your current contractors to determine their current pay status. Any contractor being paid via their Personal Services Company will be affected by these changes.
- Where any contracts run beyond 6th April, you will need to make a status determination to assess whether each of these contractors will be affected by the new rules. You will also need to determine whether you need to terminate the existing contract and re-engage to take account of any employer costs that could be payable.
- For any assignments that are affected by the new rules it is imperative that you communicate these changes to the affected contractors and everyone else in the supply chain.
How will this affect us?
HMRC propose to impose penalties and interest (as well as the payment of any taxes due) on the entity it believes have arrived at an incorrect determination. This is why it is crucial to not only arrive at the correct conclusion but to make sure this information is passed to all parties in the supply chain, as well as the worker.
How can I make sure we get things right?
Technical Resources use IR35 Shield to assist you with producing a comprehensive Status Determination for all your contractor roles. We will collate information from both the contractor and yourselves to help you arrive at the correct determination and then ensure that all parties involved are issued with a Notice of Determination clearly showing the workers’ status.
Is there anything else we need to know?
Another key factor you may need to bear in mind is compliance within your supply chain. The Criminal Finances Act 2017 has tax avoidance provisions which means that you must do due diligence to make sure that the contractors you engage with are paying the correct taxes, otherwise there could be the potential for prosecution if it can be proved that you allowed contractors to be paid incorrectly. Technical Resources will only engage with intermediaries who have been accredited by a recognised accreditation service, leaving you with the peace of mind that you have a tax compliant supply chain.
If we determine that our subcontractor is caught by these rules, will they still be able to use their Personal Services Company?
Yes, but the fee payer will need to treat the contractor’s payment as a deemed salary payment and deduct the necessary PAYE and Employee’s NI. In addition, they will need to account for and pay across any employer costs, such as Employer’s NI and, if applicable the Apprenticeship Levy. Where you have current contracts that finish after 5th April 2021, you will need to be careful not to account for these employer costs from the contract sum; you will need to pay these in addition to the contract amount. The simplest way to avoid this would be to terminate these contracts and make sure that any sums due are paid before 5th April.
What happens after 6th April 2021?
Where you engage with contractors after 6th April 2021 you will need to make a status determination for each assignment, whether it be a direct engagement or through a recruitment company. Technical Resources can continue to assist you with these engagements by using IR35 Shield to compile the necessary Status Determination reports.
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: