IR35: Off-Payroll Working Rules Explained

posted in: HMRC, IR35 Rule, Tax 0

Introduction – Are You Sitting Comfortably?

Referring to IR35 makes most people wince. It is the name of the off-payroll working rules for clients, workers (contractors) and their intermediaries or personal service companies.

The intention of the ruling is to ensure that: ‘anyone who could be an employee if providing services directly to a client pay the same level of tax and National Insurance as an employee, rather than an often reduced rate as a sub-contractor.’ Whether IR35 applies can relate to the terms of employment, and nature and duration of the contract however, many other factors are considered.

The topic is often hotly debated, with accountants, tax advisors and other financial experts admitting that it is a minefield to navigate. In this article we attempt to provide some clarity and highlight the main points for consideration.

When Will the Off-Payroll Working Rules be Enforced?

IR35 had initially only been applicable to the public sector however, it was set to be rolled out into the private sector from 6th April 2020.

In the last few hours the Government has announced a delay to rolling out the rule to the private sector to 2021 in light of the impact of the coronavirus on businesses throughout the UK.

This is a welcome relief and will give organisations more time to prepare. In the meantime we attempt to provide useful guidance on what you need to know and how IR35 may affect your business relationships in the future.

Terms of Reference

According to the Government you may be affected by IR35 if you are:

  • a worker who provides their services through their intermediary or personal service company
  • a client, or end client, who receives services from a worker through their intermediary or personal service company
  • an agency providing workers’ services through their intermediary or personal service company

The Government has provided an online checker CEST (check employment status for tax) where you can submit details of a contract to confirm if IR35 applies. however, the tool has been found to be somewhat ambiguous.

The Key Terms for Off-Payroll Working Rules Are:

  • IntermediaryAn employment intermediary is a person or business who makes arrangements for someone to work for a third person. They are also often known as an ‘agency’ or ’employment business’.
  • Personal Service Company (PCS) – a limited company which has been set up to provide the services of a single contractor
  • End Client – the entity who pays the agency in return for work done by the intermediary or personal service company

Responsibilities

Previous Application of the IR35 Rule

Previously within the public sector if you were deemed to be an intermediary or PSC you were liable for IR35 tax relevant to the worker. As such would need to deduct the appropriate tax and national insurance contributions from any payments made to them.

Also as an intermediary you would be required to complete a status determination statement (SDS) when assessing the IR35 status of contractors.

Private Sector Application

When the ruling is enforced within the private sector it will be the responsibility of the end client to determine the status of a worker relevant to IR35, and make the necessary SDS.

A determination regarding the application of IR35 all rides on the SDS process made by the end-client, and as such for many contractors is somewhat out of their control.

However, the status of any worker may be challenged by any involved party. Once a challenge is raised there is a 45 day period for status determination.

If the work is within IR35 and the contractor is working directly for the end-client, it is the responsibility of the end-client to deduct appropriate tax and NI contributions from any amount paid to the contractor.

If the contractor is employed through an agency, and the agency is actually paying for the work, then the agency is responsible for deducting tax and NI contributions from any amount paid to the contractor.

Exemptions

It should be noted that there is an exemption to IR35 where the end client is deemed to be a small business. In such a case the SDS and other responsibilities lie with the intermediary or PSC. To qualify for this exemption the end client must meet two or more of the following criteria.

  • Annual turnover is no more than £10.2 million
  • Balance sheet total is no more than £5.1 million
  • No more than 50 employees.

The Final Word

We hope that the above information has provided some clarity. This is a somewhat simplified assessment which seeks to explain the basics only. There is of course a wealth of additional information available.

We do however recommend that if you have any queries regarding the process, or concerns regarding the validity of a SDS, you contact an appropriate financial advisor for further advice. At WrightCFO this is just the kind of expert advice we can offer. If we can assist in any way with any financial enquiries, applications or advice please don’t hesitate to get in touch. We are sympathetic to budgetary constraints, particularly during this difficult time, and can discuss your requirements with you and make concessions on our pricing structure for one-off or ongoing support as needed.

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