Changes to IR35 – All You Need to Know
What Is IR35?
IR35 is the name given to the tax legislation in the Income (Earnings and Pensions) Act 2003. It applies to individuals supplying their services through an intermediary, normally their own personal service company who are usually contractors. IR35 for the private sector comes into force on 6 April 2020.
When Does IR35 Apply?
When an individual, normally a contractor, provides their services through their personal services company to a client where they could be regarded as an employee of the client.
Who Decides If IR35 Applies?
At present it is up to the intermediary to determine the status of the individual behind the service company. From 6 April 2020 the ultimate fee payer, so in most cases the end client company, will need to determine the status of the individual providing the service through the intermediary.
In the first instance, consideration should be given to using the online HMRC CEST (Check Employment Status for Tax Tool) to check status. There are also legal principles outlined below to consider.
Legal Principles to Consider
Mutuality of obligation between the parties. Control exercised over the individual contractor.
Substitution – the right to place a substitute in place of the contractor.
Integration into the workforce.
Financial risk to the contractor of running their own business.
The reality of the situation – does the reality of the situation accord with the agreements in place?
Any agreements should provide for a client-lead dispute resolution, in the event of a dispute.
What Happens If IR35 Does Apply?
The fee payer or the end user client should make deductions for income tax and National Insurance Contributions on the fees to be paid to the intermediary and account to HMRC.
When Does IR35 Not Apply?
IR35 does not apply where the services are supplied to small companies, ie a company meeting two or more of the criteria below:
an annual turnover no more than £10.2m
a balance sheet total no more than £5.1m
no more than 50 employees on average over a year
What You Should Do Now
Review your existing arrangements to assess IR35 liability.
Re-draft your commercial contracts having regard to the legal principles above and the actual assignment.
Consider use of an umbrella company which employs the contractor direct.
Transfer to employee status and PAYE.
For specialist advice on IR35, please contact Michael Delaney in our Employment Law team.
To discuss any current or future interim recruitment needs, please contact Evy Young on 0044 203 670 1111 or email firstname.lastname@example.org.