Whether you’re currently contracting, looking to contract, or just wondering what this ‘IR35’ is all about – this video is for you!
What does IR35 stand for?
Well, IR35 is the name that’s commonly given to the anti-tax avoidance legislation that was introduced in April 2000.
- I – Inland
- R – Revenue
- 35 – Press release issue number 35
What does IR35 mean?
it’s tax legislation that’s intended to ensure that people who offer their services in a self-employed capacity and typically through a personal service company that they pay the right tax. IR35 was also the name of the Inland Revenue press release that launched the change.
IR35, what is changing?
Well IR35 itself isn’t changing, but what’s happening is there’s new legislation being introduced called the ‘Off-Payroll Working’ rules. This legislation was introduced in the public sector two years ago in 2017 and it’s coming into the private sector from April 20 next year. The key change is that the assessment of tax status for self-employed individuals for these contractors, the obligation to assess IR35 status is moving from the individual contractor over to the end client, to the hirer.
What to do if IR35 applies?
if IR35 applies you have to pay the appropriate employment taxes. At the moment in the public sector, where the new rules apply and have applied since 2017, those deductions would be made by the intermediary or the end client who pays you. At the moment the private sector, the old rules the existing rules continue to apply, and the deduction should be made by the personal service company. Again, that’s changing from April ’20 next year, when it will be your end client will make those deductions.
IR35, Who is liable?
Liability currently depends on who you’re working for, so if you work in the public sector then the end hirer or the intermediary that pays the personal service company is liable. If you work in the private sector, it’s currently the contractor and the contractor’s Limited Company that’s liable. The big change that’s happening in April ’20, is that liability will shift to the private sector end client or to the intermediary that pays the company. There is one exemption to that change, if your contracts are working for a small business, you’ll continue to be liable for this risk post-April ’20.
IR35, Who is responsible?
Similar to the liability point, the responsibility here really means doing an employment status test on any particular contract. If that employment status comes out as employed, then you’re liable for taxes. Similar to the previous question, if you’re working for a public sector client, responsibility currently sits with that public sector client and will continue to do so.
If you’re working in the private sector, the responsibility for determining your employment status currently sits with you as the contractor. Responsibility will shift to your own client from April ’20, again with the exemption for contractors working for small businesses and in that scenario, it will continue to be the contractor that’s responsible for managing this.
IR35, Who decides?
Ultimate decision on this again rests with different parties and linked to the questions above. The decision here is decision around employment status and as referenced previously, if you’re in the public sector, public sector body decides. Private sector currently the contractor decides, but post-April ’20, it will be the end client that will decide. Interesting point around who decides, there is going to be a challenge process in the new legislation. So that’s an opportunity for contractors to try and have some influence around a decision if they disagree with it.
IR35, Who is affected?
IR35 only really applies if there is a personal service company being paid for the services of an individual. So if you work through an umbrella company, on an agency payroll or if you’re directly employed by somebody to provide work, then IR35 isn’t in play. It only affects contracts where there’s a personal service company and the people that will be affected will be the contractor, any agency or other intermediaries in the supply chain and the end client. So all of those parties need to consider IR35.
How will IR35 impact contractors?
Well, of course, it’s already impacted contractors in the public sector because for 17 years up until the change in April 2017, they were through their personal service company determining their employment status. Same thing is now going to happen in the private sector from April ’20 next year. The biggest change is that having spent all of the last two decades determining their own employment status, that determination now passes over to their end client the hirer.
How does IR35 work?
Okay so IR35 asks the contractor today in the private sector (but of course that’s changing from next year when the question will be asked primarily of the hirer) to take an objective look at the way in which the contractor provides their services to that end client. What it’s asking is: was the manner in which those services provided a genuinely self-employed relationship between the contractor and the end hirer or was it more of an employment type relationship or what HMRC called that of disguised employment?
So the hirer for next year, the contractors today in the private sector, must look at the contracts that govern that relationship, but perhaps more importantly, they have to look at the working practices to say: was I genuinely self-employed in that relationship or was it that I behave and provide my services more like HMRC calls it a disguised employee?
How will IR35 impact me?
Well, it depends on who “me” is. If I’m a contractor today in the private sector, I will have spent many years perhaps determining my own employment status for tax, but from next year that determination will be made by my end client by my hirer. I need to ensure that my end client my hirer, and my agency, indeed, are doing the right thing to manage this legislation properly.
If I’m an end client of contractors, well I need to understand what IR35 says and means, what the ‘Off-Payroll Working’ rules say and mean, and ideally need to put in place processes and policies to make sure that I manage this legislation properly.
If I’m an agency, well you know I will have obligations around perhaps how I pay the contractor that I have engaged, and I need to ensure that the contractor and my end clients understand the legislation and that the end client, in particular, is managing it properly and with what HMRC calls reasonable care.
When did IR35 start?
IR35 came in originally in April 2000 and there’s been a couple of changes. One major change in April 17 and that was when responsibilities shifted from the contractor in the public sector. IR35 will start again under another guise of ‘Off-Payroll Working’ in the private sector expected to be in April ’20.
When does IR35 apply?
IR35 applies where you have an off-payroll worker who’s doing work for an end client and providing their services through their own personal service company. It applies on an assignment by assignment basis, so you need to reassess the status every time there’s a new contract.
When did the IR35 rules change?
The rules changed in the public sector on the 6th of April 2017 and the rules will change in the private sector on the 6th of April 2020. The date of change, crucial point here which caused some issues in the public sector, is any payments made after the 6th of April will be impacted. So you could provide services prior to but if payment is made after that 6 of April, then it will be impacted by these changes.
If you need more information, why not check out our FREE IR35 guide here.