IR35 is tax legislation that impacts workers who are working for a client through their own intermediary, often a personal service company (PSC) [which is a Limited Company], but would be an employee if they were providing their services directly.
These workers are also referred to as off-payroll workers.
As off-payroll workers are paid through their own intermediary, they pay Income Tax and National Insurance contributions (NICs) in a different way to an employee.
The off-payroll working rules are in place to make sure that where an individual would’ve been an employee if they were providing their services directly, they pay broadly the same tax and NICs as an employee.
At Union Jackson we work with Umbrella Company candidates, Personal Service Company candidates, and, of course, our lovely clients - so below you will find three sections with info for each!
If you are using an Umbrella Company to process payment for your freelance work, you are an employee of the Umbrella Company and already compliant with IR35 tax legislation as you are paying Tax and National Insurance on the standard PAYE model - so go treat yourself to a nice cuppa....
Yes, both Clients and Personal Service Company Contractors are affected by changes to the IR35 legislation.
How IR35 tax legislation currently works...
Currently, for contractors working in the private sector, it is the contractor’s responsibility to determine the IR35 status of each assignment.
Many contractors operating through a PSC often seek the advice of their accountant to help them determine their IR35 status.
If the contract is found to be inside IR35 it is the responsibility of the contractor to complete the deemed salary calculation, make the RTI [Real Time Information] submissions to HMRC and pay the correct levels of tax to HMRC.
In the event of an investigation, if HMRC disagree that the contract was outside of IR35, they will issue determinations for unpaid PAYE and NIC’s and possibly penalties. This will be the contractor's liability.
What happened in April 2017 - IR35 Public Sector changes?
In April 2017 the off-payroll reforms in the private sector saw changes to how the IR35 legislation was to be applied:
The responsibility for determining the contractor’s IR35 status (i.e. whether a worker should be regarded as an employee for tax purposes if they were engaged directly) transferred from the contractor to the public sector organisation.
If there is another party in the supply chain who pays the PSC, such as an agency, the client/end hirer advises them of their decision before the contract or work starts.
If the public sector organisation determines the contract to be inside IR35; unless it has not used ‘’reasonable care’’ to arrive at its decision, the party who pays the PSC (known as the ‘’fee payer’’ and often an agency) is treated as the employer for tax purposes. Before making the net payment to the PSC, the ‘’fee payer’’ is responsible for accounting for and paying the income tax and NICs (both employees and employers) (and apprenticeship levy if applicable) under PAYE to HMRC on all payments. (No employee rights are conferred to the worker)."
What's happening from 6th April 2021 - IR35 Private Sector changes?
Put simply, from 6th April 2021 the Public Sector changes which were applied to IR35 from April 2017 are being applied to the Private Sector and will see the responsibility for determining the IR35 status of an engagement shift from the contractor to the end hirer (where the end hirer is a medium or large company*).
How does this affect the contractor - what happens in practice?
In practice, from 6th April 2021, it will be the legal responsibility of the client/end hirer to decide the IR35 status of all contract placements and issue a Status Determination Statement (SDS) against that contract.
Client responsibility, Payer liability.
As with the current rules within the public sector, the party who pays the PSC (known as the ‘’fee payer’’ and often an agency) is treated as the employer for tax purposes. Before making the net payment to the PSC, the ‘’fee payer’’ is responsible for accounting for and paying the income tax and NICs (both employees and employers, and apprenticeship levy if applicable) under PAYE to HMRC on all payments. (No employee rights are conferred to the worker).
Where the Recruiter does not operate payroll and the position is within IR35, they will ask the Contractor to use a vetted Umbrella Company payroll scheme which renders the Contractor IR35 safe.
*Small Companies Exemption - The legislation applies only to ‘medium or large’ businesses. There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:
Annual turnover is no more than £10.2 million
Balance sheet total is no more than £5.1 million
No more than 50 employees.
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the PSC and the changes do not apply.
The government has included clauses in the legislation to ensure medium or large businesses do not set-up arm’s length companies or subsidiaries to procure services from PSCs. The legislation will apply to the parent company based on the aggregate amount of turnover and the aggregate amount of the balance sheet total of the connected entities.
There’s no small business exemption for public sector organisations and the legislation will apply to all end-clients engaging PSC workers in the public sector.
Please note: Until April 6th, 2021, and following that date, where the company is deemed to be a Small Company, it remains the responsibility of the Contractor to determine the IR35 status of a contract. Ignoring this puts the Contractor at risk of liability for unpaid Tax and NI in the event of an HMRC investigation which finds a role determined by the Contractor to be outside IR35 to be inside IR35.
HMRC's Check Employment Status for Tax (CEST) tool can be used to determine the IR35 status of a contract - the tool can be found here...
Following 6th April 2021, should a Contractor disagree with an IR35 decision having undertaken a role, they must contact the client who has 45 days to respond to the dispute with their reasons for making the decision. From here, the client will be required to confirm or change their decision and, if necessary, provide a new status decision.
You may be working with your Legal support, HR Department or have partnered with a third-party platform to help produce the legally required Status Determination Statements for each freelance placement after the changes to IR35 in the private sector come into effect on 6th April 2021.
If not, there is an easy and free option provided by HMRC which can be found at: https://www.gov.uk/guidance/check-employment-status-for-tax
Using HMRC’s free CEST Tool (Check Employment Status for Tax) to make a Status Determination and obtain a hard copy for your records and to forward to your recruiter, is a matter of a few minutes work and, while not perfect in its execution, is your go-to tool where you do not wish to engage Legal support, an HR Department or the services of a third-party platform.
Please contact Anthony firstname.lastname@example.org for any help or additional information – he will be very happy to work through the CEST Tool with you and offer advice on completing your Status Determination Statement.