IR35 – Off-Payroll Tax Changes
From April 2020, HMRC is rolling out its IR35 tax rules to incorporate private sector contracts as well as the public sector rules already in place.
IR35 – What is it?
IR35 or off-payroll tax law allows HMRC to treat fees paid to a limited company as if they were a salary paid to an employee. This means that the contractor’s fees are taxed at source by their clients.
IR35 and the Public Sector
In April 2017, the IR35 laws were introduced into the public sector. However, because the legislation surrounding the law is so complicated, many public sector bodies decided to err on the side of caution and applied IR35 to contractors across the board. This led to many contractors paying more tax than they needed to, which in turn led to delays and difficulties with projects being fulfilled.
Why are the IR35 rules being extended?
The IR35 rules were introduced to stop ‘disguised employment’ where a contractor who would otherwise be employed, invoices clients through a Personal Service Company (PSC) or other intermediary. This often leads to individuals paying less tax and companies being able to avoid paying National Insurance contributions as well as sick pay and holiday pay.
The IR35 rule is also designed to promote fairness and ensure individuals working in a similar way pay equal taxes and contributions.
Who is affected?
- Individuals supplying their services through an intermediary such as a Personal Service Company (PSC) and who would otherwise be employed if engaged directly.
- Medium and large sized organisations who contract work to individuals through PSC’s.
- Recruitment agencies and other intermediaries who supply staff through PSC’s.
How is IR35 assessed?
To determine whether the IR35 laws apply to your contracts, in an investigation HMRC will follow ‘tests of employment’ procedures as per UK employment law. Instead of looking at the written contract in place between an individual and their client, an inspector will examine the actual nature of the working relationship. This is then presented to a judge who will determine whether the contract is one of employment where the IR35 rules would apply, or a business to business service where the rules do not apply.
Does IR35 apply to you?
When deciding whether the IR35 rules apply to your contracts there are three main principles to consider.
- Supervision, Direction and Control: How far can your client direct what, how, when and where you complete the work agreed in your contract?
- Substitution: Can you send someone in your place to carry out the agreed work or does it require you to carry it out personally?
- Mutuality of obligation: Is your client obliged to offer you work, and are you obliged to accept it?
To stay clear of the IR35 rules you’ll need to prove how and why your contract with your client falls outside of these principles, whether you work in the public or private sector come April 2020.
Your contracts should also clearly identify your status as a freelancer or a contractor with invoices for various projects. The contracts should identify the scope of the services you’ll be providing, where those services will be provided and the allocated time frame (eg – how many hours per day)
What are the proposed changes to the private sector?
Currently, the service provider is responsible for determining whether the IR35 rules apply to their contracts with clients, however from April 2020 the responsibility will shift to the client.
There is also a 5% allowance in place available to those who apply the IR35 rules to cover the costs of administering them. Unfortunately, this 5% allowance will no longer be offered from April 2020.
For more information on the rules for off-payroll working from April 2020 see HMRC’s policy paper here.