What is IR35?

Many clients ask us, what is IR35? In short, IR35 legislation aims to address those workers who are not taken on as a normal employee and be subjected to the normal PAYE regulations, but as a contractor who operates through an intermediary company, typically known as a Personal Service Company usually created as a limited company that they own. However, they do still hold a full time and permanent position for a single client. This type of arrangement is considered to be a “disguised employee”.

A salary paid directly to an employee is subject to tax and Employees and Employers National Insurance Contributions which are handled by the employer under PAYE. In a Personal Services Company, the worker receives payments such as dividends. Whilst they still pay the appropriate taxes, usually a ‘deemed payment’ of income tax made at the end of the tax year, their payments are exempt from National Insurance Contributions from both the employee and the employer.

IR35 aims to prevent disguised employees from using this working arrangement to avoid National Insurance Contributions.

Why the new IR35 legislation?

Since 2000, contractors have been responsible for assessing their IR35 status and National Insurance Contributions themselves. This arrangement has been deemed ineffective by the HMRC who estimate that if self-assessing is allowed to continue, the cost of non-compliance in the private sector would escalate to £1.3bn by 2023.

IR35 Datelines

In April 2020, responsibility for assessing IR35 obligations shifts from the contractor or Personal Services Company to the employer, known as the “end-user” to HMRC.

Where the end-user assesses that IR35 applies, the fee payer (the end-user, a recruitment agency or other third party) will be responsible for accounting for and paying the related tax and National Insurance Contributions to HMRC which will include the additional cost of Employer’s National Insurance Contributions.

These new rules aim to reduce the cost of non-compliance investigations by the HMRC and make it easier for them to monitor and enforce compliance in the future.

Who will the new IR35 legislation affect?

• Medium and large businesses in the private sector that are the end-user of the worker’s service
• Fee-payers, such as the recruitment sector
• Contractors providing services to medium and large businesses

Where the end-user is a Personal Services Company, they will continue to be responsible for assessing whether IR35 applies. It should be remembered that the Companies Act 2006 defines a small business as having two or more of the following features:

• turnover of £10.2m or less
• a balance sheet total of £5.1m or less
• 50 employees or fewer

It is expected that fee payers such as a recruitment business will not have any additional obligations other than the existing requirement to submit a quarterly intermediaries’ return to HMRC, with details of workers placed with clients where they do not operate PAYE.

Recruitment companies & the service sector

Recruitment agencies and businesses that fall within the service sector will need to determine whether IR35 rules apply to a potential contractor and formally notify the ultimate fee payer.

Where IR35 does apply, the fee-payer must apply the PAYE rules. This means that they must deduct the appropriate tax and employee/employer national insurance contributions and/or the Apprenticeship levy where applicable and pay them directly to HMRC.