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IR35 reviews

Intermediaries' legislation or 'IR35' as it's commonly known, is a set of anti-avoidance rules that were introduced in April 2000, to prevent disguised employment. It was designed to stop contractors, who worked through their own limited companies, but would otherwise be classified as employees, from gaining the tax benefits associated with working in this way.

Prior to these rules, a worker would resign from his employment on Friday and return on Monday to the same role in the same company but as a contractor. The only difference being he is now employed by a personal service company of which he is a controlling shareholder and director.

By providing services through their own company, the worker could avoid national insurance contributions and minimise his tax liability by paying himself through a combination of salary and dividends. The original employer on the other hand could avoid paying Employer's NI, thus saving 13.8%. IR35 rules were implemented to deter such activities, by removing the tax benefits.

As a contractor it is imperative that you are aware of IR35 legislation, as it affects everyone in the contracting business. In a nutshell, IR35 legislation tries to tax your company income as employment income meaning that almost all of the tax advantages gained will be lost if you fall foul of IR35.

Many contractors work via their own personal one man service company. This company is known as a personal Service Company – PSC for short.

In the chain between the contractor and the end user there is one organization that contracts with the personal service company, or umbrella company. This last organisation/agency to pay on invoice is termedthe fee payer, or engager. In the absence of the agency, the end client will be the fee-payer.

Under current rules there is no right of appeal on IR35 status. Thus, speaking with your client is the best way to understand the reason behind the decision of your client regarding your work status.

However, the draft new rules, include a right of appeal that may be applicable from April 2021 but not before.

Under these new rules the individual contractor can appeal and make representation to the client to assist in determining status. These representations must be considered within 45 days and either a new certificate issued or the old one ratified.

HMRC have released a Check Employment Status Tool (CEST) for use in determining IR35 status. Unfortunately, like all its predecessors it is flawed. It has been acknowledged that in 15% of cases it cannot make a decision at all. But assessing IR35 status is an art not a science so it would be impossible to do accurately from a question and answer session alone.

HMRC have advised that if you can get it to give you a decision of not caught, with accurate information inputted, then they will stand by that answer – however in a recent court case they tried to throw out such a result as irrelevant.

In all we would not recommend using this tool alone in making status determinations.

However, this does not stop many clients wanting to use this tool to make their decisions.

If caught by off-payroll working and IR35 then the end client is responsible for calculating your PAYE. The can delegate this down the supply chain to an intermediary, but the PAYE has to be deducted before payment is made to your personal service company.

If not subject to off payroll working but you have your own limited company, then your company is responsible for calculating and paying over any PAYE taxes due.

If working via an Umbrella company then they will calculate and deduct all the PAYE taxes necessary.

If you go on the client or agency payroll then the client/agency will calculate and deduct all the PAYE taxes necessary.

In the first instance, under off payroll working, the client determines your status. You may challenge this determination after 6th April 2021 at any time.

If you are judged caught when not, then only you are likely to complain, and you have to do this within 45 days, so the taxes may be refunded to you.

If you are judged caught by IR35, now or in the future, then the client is responsible for collecting and paying the tax & NIC. HMRC may collect these taxes from the client or any intermediary/agent down to the fee payer of your PSC.

It is for this reason that clients do not want to continue to pay a PSC. Many private clients are therefore now only offering the options of payroll or an Umbrella solution for future contracts, whereas the public sector have mostly chosen to err on the side of deducting the PAYE taxes today, rather than risk a bill in the future.

Under off-payroll, PAYE will be calculated and deducted based on when the services are performed. Hence these new rules affect all services carried on or after 6th April 2021. As per HMRC guidance, any payment made for work carried out prior to 6th April 2021 will not be caught under the off-payroll working rules.

It is therefore recommended that you review all contracts before 5th April 2021.

If you are a contractor working for your own PSC or partnership and the end client is large or medium sized then yes you are effected by the reforms. Your end client will need to assess your IR35 status for all services carried out after 6th April 2021.