Officially known as the Intermediaries Legislation, the Off-Payroll workers’ rules or IR35 takes its name from the original 1999 press release published by the then Inland Revenue (now HMRC) announcing its creation.Part of the Finance Act, the IR35 ‘working through an intermediary’ involves applying three main principles to determine one’s employment status:
• The degree of control that the client has over the logistics of when, where and how the worker completes the work.
• Whether the worker is expected to complete the work or a substitute can be used.
• The level of obligation expected of the employer to offer work and the worker to accept it.
Currently, the IR35 legislation only applies to the public sector; however as from the 6th of April 2020 the Off-Payroll workers’ rules will be extended to cover the private sector. This means that if you work for a client through an intermediary, you may find your employment status and tax bracket changes. However, on the plus side, 1.5 million small and medium-sized enterprises (SMEs) with turnovers below £10.2 million, a balance sheet total of less than £5.1 million, or fewer than 50 employees, will be exempt from the new rules.
The IR35 was introduced to the public sector in 2000 and required individuals who worked as employees through their own companies, to pay similar taxes to those paid by other employees. Those not complying with the previous tax rules were paying significantly less income tax and NICs than an equivalent employee; the Off-Payroll workers’ rule was designed to combat such ‘disguised employment’ tax avoidance.
HMRC believes that the introduction of the IR35 legislation to the private sector will put a stop to this type of tax avoidance and provide the country with an extra £3.1 billion by 2024. The private sector includes third sector organisations such as charities, associations, self-help groups and community groups, social enterprises, mutuals and co-operative organisations.
As part of this reform, the tax liability will transfer from the contractor to the fee-paying party in the supply chain; typically the organisation paying a worker will be the fee-payer. If a party in the labour supply chain receives the employment status determination, but does not pass it on, they will become the fee-payer. Check on the government's website to find out whether you are the fee-payer and what your responsibilities are if the off-payroll working rules (IR35) apply.
This means that if you work through your own limited company and provide services to medium or large firms in the private sector, from April next year you will no longer be able to decide if your contract resembles employment or self-employment and therefore your tax status. The power to do so will be passed over to your client. The liability will also shift to either your client or the agency you work through.
If you are a worker providing a service, an agency placing a worker, or an organisation or person hiring a worker, you can use the government’s ‘check employment status‘ service to help you decide if the off-payroll working rules apply to you.
Private sector clients must start applying the new rules when the changes come into force on 6 April 2020.
If you use the simplified test to determine your business’ size, you must apply the rules from the start of the tax year following the end of the calendar year when you met the conditions.
When a worker’s employment status is received, the fee-payer must calculate and deduct employment taxes and National Insurance contributions from the payment made to the worker’s intermediary and report the transaction to the HMRC. You must take reasonable care when you make a determination about the employment status of a worker, as failure to do so will result in the worker’s tax and National Insurance contributions liability becoming your responsibility.
From 6 April 2020, as the client you must provide the worker, agency, or other organisation you contract for with a status determination statement, regardless of whether the off-payroll working rules apply or not. You must also provide reasons for the awarded status decision.
Your work status determination must be obtained on or before the date that any contract is entered into. If the work starts later, you will need to give your determination before that later date. You will hold the liability for any tax and National Insurance contributions until you inform the worker and the person you contract with of your determination and the reasons for it. A status determination statement issued before 6 April 2020 is valid under the new rules.
There are many companies on the internet offering various types of assistance to those wishing to know more about the IR35 tax reform and how to protect themselves from higher taxes.
There are also many other sites that offer tax avoidance guides and advice; however, when considering any type of tax avoidance tactics, keep in mind that although the number of contractors actually investigated remains fairly small, the financial cost if found out is significant. On top of these costs, any owed tax or national insurance contributions will be expected to be paid back from the beginning of the contract. It therefore makes sense to ensure that you are compliant from the get-go.
It is strongly recommend you consult an IR35 contract review specialist to examine each new contract you take on and consider taking out IR35 insurance in case you are selected for investigation by HMRC. It is in your best interests to protect yourself in the event that you are selected for an IR35 investigation.
Would you like to share your experience of life abroad with other readers? Answer the questions here to be featured in an interview!