What is IR35?

If the proposed introduction of ‘off-payroll’ to the private sector comes into force in April 2020, there will be changes in the way that Contractors, operating via Ltd companies, will be paid.

Otherwise known as The Intermediaries Legislation or ‘off-payroll’ working

IR35 is tax legislation which was introduced in April 2000 and was designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company. It was designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax, when they take on work for an end client. If a contractor is ‘inside IR35’, HMRC sees them as an employee and they face an income tax and National Insurance burden, just as employees do. Contractors don’t face this if they’re ‘outside IR35’.

HMRC use a number of factors to assess if a role is inside or outside the Intermediaries Legislation including, but not limited to;

  • Personal Services
  • Mutuality of Obligation
  • Right of Substitution
  • Financial Risk
  • Right of Control

HMRC Checking Employment Status Tool

What is changing?

Currently in the private sector, the contractor at the Personal Services Company (PSC) is responsible for determining if their role sits inside or outside the Intermediaries Legislation. Under the proposed changes in April 2020 the responsibility of determination will move to the end hirer or client and the liability for deducting and paying the tax will rest with the fee payer. 

These changes were introduced into the public sector in April 2017 and have been in effect since that date. The test for determining status is not changing. 

Why is it changing?

Contractors who work through their limited company (PSC) benefit from a level of tax efficiency, but in turn do not enjoy employee benefits such as sick or holiday pay. The concern is that under the current system that some contractors, and in turn some end clients, might take advantage of the tax efficiency of working through a limited company, when in practice the contractor is essentially working as an employee i.e. disguised employment.

The benefit for companies hiring PSC contractors in this way is that they don’t have to pay employers’ National Insurance contributions or give employee benefits. HMRC have stated that 9 out of every 10 limited company workers who state they are outside IR35 actually fail the test and that the cost of this non compliance is estimated to be £1.2 billion by 2022/23.

When is it changing?

April 2020. The last consultation finished in May 2019 and it is expected that draft legislation will be introduced in the summer of 2019. 

Who will it impact?

Contractors working via a limited company/personal services company. This will also have an impact on the end clients as ‘reasonable care’ is required in assessing every role, to determine if it sits inside or outside. Companies have been advised not to take a ‘blanket’ approach to their assessments as this would be deemed to be outside. 

If you are a company looking for advice on how to prepare for the Intermediaries Legislation, please contact Victoria Walmsley, Managing Director, on vwalmsley@morganmckinley.com and we can discuss solutions available to you and your contractors.

Considerations

Each company will make their own policy changes and so we cannot advise contractors today what the outcome will be. We understand the options will be: If your role is determined to be outside - this should mean there will be no change for you. However, some organisations are looking at Statement of Works for contractors who works on certain types of project.

If your role is determined to be inside IR35 and the end client wants to continue your engagement options could include:

  • Change your status to PAYE
  • Opt to work via an Umbrella company
  • Continue to work via a PSC with the deductions from your fee payer, however a number of organisations will not offer this as an option

Please find links to some useful sites for further information:

More information about IR35 from Morgan McKinley

Updates on contracting in the UK

IR35 and Off Payroll

IR35 in private sector

Victoria Walmsley's picture
Managing Director
vwalmsley@morganmckinley.co.uk