What is IR35?
The Intermediaries Legislation known as IR35 has been around since 2000. Its aim, when introduced, was to remove the tax advantages of providing services via a Limited Company for individuals who are not truly in business on their own account. The rules sought to identify 'disguised employees'; those whose working practices had the features of traditional employees rather than those working on their own account.
The application of IR35 in practice has, according to successive governments, failed to crackdown on this so called 'disguised employment' and they consider many Limited Company owners continue to operate illegitimately outside the rules. In response to this avoidance new 'off-payroll' rules were implemented in the public sector in April 2017.
For the first time, instead of the contractor being responsible for determining their IR35 status, the obligation was moved to the engager of the contractor i.e. the end client. Where the client deemed a contractor to be 'inside' IR35 then the client or the employment intermediary (through which the contractor is engaged if there is one) must apply statutory deductions i.e. tax and NIC from the contractor’s pay and also pay Employer’s NIC as if the contractor were a traditional employee of the client.
Rolling out to the Private Sector
Implementation of these new 'off-payroll' rules have been widely criticised, in particular the online Check Employment Status for Tax tool (CEST) provided by HMRC to assist clients in making informed determinations. This has resulted in some clients, anxious to avoid the penalties for making an incorrect determination, applying blanket 'inside' IR35 decisions.
Despite the difficulties with implementing the new 'off-payroll' rules in the private sector, the Chancellor announced that they will be extended to most private sector businesses from April 2020, with a provision that small businesses* will be excluded.
For their part HMRC has promised the shortcomings of the CEST tool, as experienced by the public sector, will be addressed in time for implementation in the private sector, thereby simplifying the determination of the status of the contractor for the end client.
What does this Mean for the Private Sector?
The original consultation on implementation of these new rules in the private sector closed in August 2018 and we now await the detailed consultation from Government to be published.
If all stays as it is, clients will need to prepare to determine the IR35 status for each of their existing contractors and to have a plan in place for implementation of any changes before April 2020. It is worth stating clearly, however, that there is no need to panic or to rush this activity.
Once the August consultation is published, we will be in touch with both our clients and contractors, working closely to set up the right processes and procedures for establishing the tax status associated with the various roles undertaken by our contractors prior to the legislation coming into force on 6 April 2020 and to implement any changes smoothly and efficiently.
If you have any questions about IR35 and its impact on you as either a client or a contractor of Jonathan Lee, please feel free to either email me or call me for a discussion on 01384 446153.
*Small businesses must meet two of three of the following criteria to be exempt (annualised turnover less than £10.2m, balance sheet assets of less than £5.1m, average number of employees of 50 or fewer).