What is IR35?
If you’re not directly employed by your client in a traditional sense, but you use an intermediary (such as a Limited Company) to provide your services, the intermediaries’ legislation – known as ‘IR35’ – may apply to you.
Broadly, an engagement will fall within the new IR35 rules for payments made for services provided on or after 6 April 2021, where:
- a worker is personally providing services to a public sector or medium/large private sector end user via their own intermediary, and
- if the intermediary was ignored, the contractual and working arrangements between the worker and end user have the hallmarks of employment.
This is the case even where the end user engages with an agency or similar for such a worker’s services.
The intermediary would normally be a limited company, but might also be a partnership or LLP.
This obligation to assess whether the contractual and working arrangements have the hallmarks of employment or self-employment lies with the end user of the worker’s services, who must issue a Status Determination Statement (SDS).
Where the SDS shows that the worker has employment status the fee-payer (who may be the same as the end user or another third party, such as an agency) must operate tax and National Insurance contributions (NICs) under PAYE when paying the intermediary. The apprenticeship levy may also be payable on those payments too. The employer’s Class 1 NIC and apprenticeship levy due would be an additional cost to the fee-payer.
Why was IR35 introduced?
The amount of tax you pay depends on whether you’re working for your client via a Limited Company or as an employee.
In order to enjoy the tax benefits of working as a contractor, some employees disguise themselves as a Personal Service Company. This way, they can divide their Income Tax and National Insurance Contributions between a salary and dividends – resulting in a higher take-home pay than a regular employee.
So, by introducing IR35 in 2000, HMRC wanted to ensure that people were being taxed according to their true circumstances. In essence, IR35 determines if you’re:
a) A Limited Company contractor; or
b) An employee.
As a Limited Company, you shoulder complete responsibility for paying the right amount of tax.
Are you a contractor or an employee?
When your client engages you to provide them with services through your Limited Company, you need to work out if you’ve simply replaced a previous employee.
If so, the chances are that your contract is caught by IR35 because your Limited Company is, for all intents and purposes, masking your duties as an employee.
When the rules apply
The rules apply if a worker provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly.
A contract for the purpose of the off-payroll working rules is a written, verbal or implied agreement between parties.
The off-payroll working rules apply on a contract-by-contract basis. A worker may have some contracts which fall within the off-payroll working rules and some which do not.
Before 6 April 2021:
- If you’re a worker and your client is in the public sector, it’s their responsibility to decide your employment status. You should be told of their decision.
- If you’re a worker and your client is in the private sector, it’s your intermediary’s responsibility to decide your own employment status for each contract. The private sector includes third sector organisations, such as some charities.
From 6 April 2021:
- From 6 April 2021 the way the rules are applied will change.
- All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.
- If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.
Public sector engagements
From 6 April 2017:
- Workers providing their personal services either personally or via a Personal Service Company (PSC) to a public sector body are taxed as if they are employees.
- The worker's company is no longer required to apply IR35.
- The public authority or agency is responsible for assessing the worker's employment status.
How can you find out your IR35 status?
If you’d like an IR35 assessment, contact us today to arrange a review of your circumstances.
Contact SIL Solutions (Tax advisers with a difference)
Tel: 0207 993 5016
Or just click to complete the form.