IR35 is the name given to tax legislation in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), it applies to individuals supplying their services through an intermediary, usually a personal service company (PSC). The IR35 legislation seeks to ensure that contractors working through their own PSCs pay employment taxes and NICs where were it not for the PSC they work through, they would be employed by the client, commonly known as “inside IR35”. If IR35 applies, then PAYE and National Insurance contributions are deducted from the rate. This prevents the contractor from being paid a minimum salary, up to the limit of his/her tax-free allowance and leaving the rest in the company. If money is withdrawn from a company as a dividend, although tax is due at the dividend rate, there are no NICs payable.
In April 2021, HMRC plans to change the rules around off-payroll workers in the private sector (commonly referred to as IR35), these changes will affect how tax and national insurance contributions will be calculated for some contractors working through a personal service company.
These planned changes have caused some concern amongst workers and businesses.
Why has HMRC introduced IR35
IR35 isn't something new, in fact since April 2000, HMRC has used IR35 to determine whether off-payroll workers are working under the same arrangements as employees and that they should pay the same tax and national insurance contributions. IR35 status used to be self-assessed by the worker. According to HMRC, this led to widespread non-compliance which without changes to legislation, could cost £1.3 billion by 2023.
When did the IR35 changes roll out to the public sector?
HMRC changed the rules around off-payroll workers in the public sector in April 2017. The liability for determining IR35 status was moved from the worker to the engager at very short notice.
The reaction in the public sector was to deem all off-payroll workers as inside IR35. This decision was made to avoid falling foul of the rules and suffering penalties.
This blanket decision caused many contractors to leave the public sector entirely, causing disruption and delays on several public sector projects.
When will the IR35 changes roll out to the private sector?
The changes to the legislation surrounding the responsibility for determining IR35 status will be shifted from the worker to the engager on 6th April 2021. These changes, along with some adjustments to the public sector legislation, will bring the private and public sector in line with each other.
Looking for advice on IR35?
Whether you are the end client engaging with contract workers, or a contract worker providing your services through a PSC, Employment Solutions can help. If you would like to discuss IR35 and how you think it may affect your business, please get in touch today. You can call us on 0161 839 5353 or fill out the form below.