The Intermediaries legislation, commonly referred to as ‘IR35’, was introduced with the aim of eliminating the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries. For example, own limited companies or partnerships. The legislation ensures that the worker pays broadly tax and NICs on a basis which is fair in relation to what an employee of the client would pay. This is as long as the relationship between the worker and the client would have been one of employment, had it not been for an intermediary. The topic has been further complicated by a whole host of IR35 changes in recent years.
IR35 legislation was altered in April 2017
This alteration made public sector hirers responsible for determining if workers utilising personal services companies or other intermediary vehicles are caught by IR35 or whether they are genuinely self-employed. The public sector reform made the public authority or agency that pays funds to the workers company, responsible for deducting the correct amounts of tax and NICs. The legislation change moved the responsibility for deciding the worker’s IR35 status to the end client. This was rather than the worker and their company. Getting the decision wrong would therefore result in the end client bearing the risk/cost for any missing tax.
Unsurprisingly end clients were not willing to get into the complexities of IR35. Especially when they carry the risk with many public sector end clients declaring that all workers are Inside IR35 and that they should be taxed as employees. The inevitable consequence was that contractors ended up with an increased tax burden and reduced take home pay. Worse still is that this resulted in many affected individuals being pushed into the claws of dodgy loan scheme operators. The hammer is now coming down on them hard in the form of the loan charge legislation.
Future IR35 changes
All of this background context on IR35 and the public sector off payroll changes is important. This is because in April 2020 these exact IR35 changes will be extended to effect workers in the private sector too. Therefore, it is not too difficult to predict the outcomes of this extension into the private sector. Not only can you predict the outcome you can make preparations now to protect yourself from the fall out.
There are a few legislation exceptions which do change how IR35 updates will be applied to the private sector. End clients that are classed as “small” organisations will not be affected by the changes. They will also not need to decide the IR35 status of workers they hire. The definition of small for this exception will be taken from the Companies Act. The Companies Act states two or more qualifying conditions need to be met. The conditions are: Annual Turnover below £10.2 million, Balance sheet total below £5.1 million or Number of employees below 50.
For those that feel they may be able to avoid these changes by working for off shore companies, think again. Just like the public sector changes, when the fee payer is an off shore entity, the responsibility to operate IR35 passes to the next entity in the contractual chain based in the UK. Regardless of the off shore status on those in the chain, if the worker fundamentally performs services in the UK, full tax and NIC deductions will have to be made.
Preparation is key
The key step in preparing will be evaluating if you are likely to be affected and whether PAYE is applicable. HMRC have a free online tool to help contractors make IR35 evaluations called CEST (Check for Employment Status for Tax). The CEST tool has however received heavy criticism. Users have complained about unreliability of its advice and flawed processes failing to align with many historic tax tribunal decisions. Contractors therefore need to be careful when using the CEST tool and should ideally seek additional professional legal advice. Especially if they are confused about their IR35 status and the potential impacts of the April 2020 changes on them.