In 2000, the UK Government’s IR35 legislation first came into effect. The aim was to tackle the issue of a hidden workforce that was effectively off-payroll.
The Government perceived that there was a problem with tax avoidance, where self-employed people were not being classed as employees for tax purposes.
IR35 is aimed at those contractors who are employed through an intermediary limited company, including situations where the company is the contractor’s own personal services company (PSC).
Two critical issues are:
- The status of the person contracted to do the work
- Who ends up being responsible for ensuring that they are compliant in paying their tax
Individual Employment Status
What is defined as IR35 income? It comes down to what are known as relevant engagements.
These are where someone provides services to a client through an intermediary company. Where this occurs, IR35 treats these engagements on an as-if basis: the income is treated as if the individual was the client’s own employee.
“Off-payroll working rules are there to make sure that contractors pay broadly the same tax and National Insurance Contributions as a full-time employee, if they are providing equivalent services to the client”
Anyone working as a contractor through an intermediary, needs to consider these rules. Also, anyone in the public sector hiring a contractor through an intermediary must also be clear about IR35 regulations.
“This boils down to responsibility for paying the correct taxes and contributions, and who must take it. Currently, in the private sector, it’s down to the contractor. In the public sector, it’s the people doing the hiring. However, there are proposed changes to this.”
Potential Changes to IR35
In 2017, HMRC introduced new rules around IR35, which applied to the public sector. These changes means that the burden of responsibility for making sure contractors were IR35 compliant lay on the hirer, not the contractor.
The client or hirer would be liable for any missing tax.
Now, the Government has launched a consultation into reforming IR35. One of the options on the table is extending its public sector rules into the private sector.
“Immediately, this rings alarm bells for private sector employers, especially those SMEs who already find themselves stretched administratively.”
“The public sector IR35 reforms have been controversial, with some public sector authorities struggling with the burden of taking a case-by-case approach”
“An FCSA survey revealed that 26% of surveyed public authorities were conducting role-based assessments in lieu of individual investigations. This would make them non-compliant.”
What Must Contractors Do?
“At the moment, it’s a case of watch this space. The consultation may lead to alternative reforms. In the meantime, for private sector contractors, it’s a case of them being very clear about their individual status. If they are at all uncertain, they should seek professional guidance and support.”
One solution is for them to use a reputable umbrella company.
“Having a solution to all your paperwork to do with taxes, NICs and compliance under one roof can be a real benefit to freelancers and contractors and it can continue to benefit them if they decide to register as a limited company,” Mike concludes. “It’s about having support on hand to offer clarity around issues like IR35.”