IR35 or ‘off-payroll working’ has been the root of some confusion since the repeal of reforms put forward by former Chancellor Kwasi Kwarteng was subsequently scrapped by current Chancellor Jeremy Hunt.
The tax legislation is designed to deal with a form of tax avoidance known as disguised remuneration, where individuals provide their services through a Personal Service Company (PSC) and therefore pay Corporation Tax on their income rather than being subject to Income Tax and National Insurance Contributions (NICs).
Contractors no longer responsible for determining employment status
The IR35 rules, which originally changed in April last year, exist to ensure that an individual providing services via a PSC, and who would have otherwise been an employee if they were providing their services directly to an end client, pay broadly the same income tax and NICs as a ‘regular’ employee would.
All medium and large-sized private sector end clients are now responsible for deciding a contractor’s employment status, as opposed to freelancers determining their own employment status under previous rules.
The official guidelines, for businesses affected, are as follows:
- Pass your determination and the reasons for this to the worker and the person or organisation you contract with.
- Make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid.
- Have processes in place to deal with any disagreements that arise from your determination.
If the determination results in a contractor being within the IR35 rules, it is your responsibility to deduct and pay tax and National Insurance contributions to HM Revenue & Customs (HMRC) via Pay As You Earn (PAYE).
Where an employer fails to correctly identify a disguised employment scheme, the worker’s tax and National Insurance Contributions become their responsibility.
The above guidance, coupled with a status determination tool that appears to overlook some crucial parts of the IR35 legislation and so leads many checks to come back as ‘inside IR35’, has led a lot of companies to err on the side of caution and treat contracts as being caught.
Where this is the case contractors are being treated as ‘employed’ and, more often than not, being routed through ‘Umbrella’ companies.
What businesses does this apply to?
According to the Companies Act 2006, a business is defined as ‘medium’ or ‘large’ if it meets two of the following criteria:
- The company has a turnover of £10.2 million or more
- The company has a balance sheet total of £5.1 million or more
- The company has 50 employees or more.
How can George Hay help?
We understand that the back and forth in respect of IR35 legislation has left many a bit bewildered and wondering what the current state of play actually is.
If you are concerned, or need clarity on the rules, we can discuss your circumstances in more detail with you and assist you with tax planning, should this be necessary.
Contact our team of chartered accountants and tax professionals, in Hertfordshire, Cambridgeshire or Bedfordshire, to arrange a free initial consultation.