Updated: Mar 16, 2020
IR35 is a tax law introduced in 1999. It is known as the Intermediaries Legislation and came into force in April 2000 as part of the Finance Act.
Despite having been in force since 2000, IR35 is heavily criticised by tax experts and the business community as being poorly planned, badly implemented by HMRC and causing unnecessary costs and hardships for genuine small businesses.
If you are a genuine contractor, freelancer, interim or consultant who is in business on your own account, you should have nothing to fear from IR35. This is so long as you take the time to understand how the legislation works and apply best practice to ensure it does not apply to you, and have a defence prepared if investigated by HMRC.
Why was IR35 introduced by the government?
IR35 is designed to combat tax avoidance by workers providing their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. This is where organisations engage workers on a self-employed basis and usually through an intermediary, rather than on an employment contract, so they become disguised employees.
This can save the organisation engaging the worker a significant amount of cash as they no longer have to pay employers’ NICs, and it also means they do not have to offer any employment rights or benefits such as holiday entitlements.
If such workers are caught by IR35, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed. The financial impact of IR35 is significant. It can reduce the worker’s net income by up to 25%, costing the typical limited company contractor additional income tax and NICs.
Autumn Budget 2018 – New rules
In the Autumn Budget 2018, it was announced that new rules would be brought in for the off-payroll working private sector. The new rules will be brought in from April 2020.
From April 2020, the engaging business (end client) will be responsible for deciding whether the contractor/worker falls inside or outside of IR35. If the engaging business has assessed the contractor to be inside of IR35, national insurance contributions (NIC) and income tax will have to be deducted. The deductions will be made by the fee-payer.
In some cases the engaging business itself is the fee-payer, however in many cases, the engaging business is not the fee-payer as they engage a contractor through an agency who may become the fee-payer.
In such cases, the determination of employment status is still made by the engaging business and is passed down the labour supply chain to the fee-payer (agency), who is then responsible for deducting national insurance contributions (NIC) and income tax. Where a potential fee-payer has not received a determination, they would not be required to make any deductions for income tax and NICs or pay employer NICs until they have received a determination.
The fee-payer will also be responsible for sending the income tax and National Insurance Contributions (NICs) due to HMRC.
After the IR35 consultation in the beginning of 2019, the rules have changed further. The engaging business (end client) will remain responsible for determining the contractor’s employment status and if necessary, pass the determination down the supply chain. If however they are a “small company” as defined by the Companies Act 2006, the contractor will remain responsible for determining their own employment status.
The Companies Act 2006 defines a small company as one that meets at least 2 of the 3 conditions below.
· Annual Turnover of less than £10.2 million
· Balance sheet total less than £5.1 million