What is IR35?
IR35 is a set of tax laws which form part of the Finance Act. The first piece of legislation came into force in April 2000 and is known as the Intermediaries Legislation. IR35 takes its name from the original press release published by the then Inland Revenue (now HMRC) announcing its creation.
IR35 seeks to determine tax status for individuals working through a PSC or commonly known as a limited company, ensuring that the contractor is a true independent contractor and not acting as an employee of the client.
Why is it talked about now?
The IR35 legislation has not changed. The only change is in who carries the burden for ensuring correct taxation from 6th of April 2020 in the Private Sector. The responsibility for correct taxation moves from the PSC to the fee payer. The off payroll working rules was rolled out in the Public Sector April 2017.
The government is due to ratify the new legislation in the budget the 11th of March.
What is happening?
Contractors will no longer be able to determine their own IR35 status if they are working with medium and large companies. The end client in the supply chain will be responsible for determining the Contractor’s IR35 status. This means our clients will have to bear this responsibility and we will be working with them to support them throughout these changes.
- The End Client will be responsible in cascading the status determination to the Contractor and across the entire supply chain
- There will be an opportunity for the Contractor to dispute a status determination (45 days from determination)
- Stott & May will be responsible for ensuring the appropriate deductions of PAYE and NI are made if the Contractor is deemed to be Inside Scope of IR35
- HMRC advises that all status determinations should be made with reasonable care and transparency by the hirer/End Client.
- Unaffected are Contractors working for End Client Companies in their first year of trading and Small companies.
Definition of a small company:
– Annual turnover not more than £10.2m
– Balance sheet not more than £5.1m
– Not more than 50 employees
If a Contractor provides services to a small company (defined by meeting two of the above criteria), that company will be exempt from these reforms and the Contractor will remain responsible for determining their IR35 status.
Why is it happening?
The HMRC have introduced this legislation to:
Improve compliance: The change is aimed at improving compliance and ensuring the payment of tax and NI for those working through PSCs. The government have stated that non-compliance is widespread with only 10% of individuals who should be inside IR35 paying the correct levels of tax and NI.
Align industries and sectors: The Government see the Public Sector IR35 reforms of 2017 as a great success and have decided to align the Private Sector. An extra £1.2billion of NI and PAYE taxes has been projected for the tax year 2020/21 by the Exchequer.
How is the status determined?
The most common way to determine IR35 is through the HMRC CEST Tool.
The factors considered in the determination focus on responsibilities and how the work is performed. Key factors are:
Control: what degree of control does the client have over what, how, when and where the worker completes the work
Substitution: is personal service by the worker required, or can the worker send a substitute in their place?
Mutuality of Obligation: mutuality of obligation is a concept where the employer is obliged to offer work, and the worker is obligated to accept it.
What happens next?
Stott & May is working with our clients to confirm the status determination of all of our Contractors based in the UK (not working under a SOW) to ensure everyone is ready for the change in April 2020. We are also speaking to our Contractors about what these changes mean for them and the options available.
The options available depending on determination and how the work is performed:
- Out of Scope Contract
- In Scope Contract
- SOW (Statement of Work) Service delivery based on milestones or KPIs
If you have any questions, please don’t hesitate to contact us on [email protected] or your Stott & May contact.