IR35 for beginners

IR35 – what’s it all about?

IR35 refers to rules around off-payroll working. The rules were introduced to tackle tax avoidance. Essentially, if an individual would be an employee of the end client, had they not been providing their services through an intermediary (such as the individual’s own personal service company), they should be paying the same tax and national insurance as employees – a ‘deemed employment payment’.

What’s the current position?

The current position in the private sector (pre-April 2020) is that the intermediary is responsible for determining if IR35 applies and for ensuring that the correct deductions are made for income tax and national insurance. If the intermediary gets it wrong, HMRC can back claim for the tax and national insurance, plus interest and can impose penalties.

In the public sector, new rules have been in force since 6th April 2017 and, under those rules, if IR35 does apply, the responsibility for making deductions for income tax and national insurance shifts to the next party along from the intermediary (which could be the end client public authority, or another intermediary).

What’s changing in April 2020?

Medium and large sized private sector clients will be responsible for deciding if IR35 applies, rather than the individual’s intermediary.

The changes, however, don’t apply to small companies. If you are a small company, the existing rules will continue to apply after April 2020, i.e. the responsibility lies with the worker’s intermediary.

Medium and large sized private sector clients will also be required to give the individual a status determination.

What’s a “small company”?

A small company is one where two or more of the following applies:

Annual turnover not exceeding £10.2 million
Balance sheet total not exceeding £5.1 million
Average over a year of not more than 50 employees

When will we know the final details?

HMRC has launched a consultation welcoming views on the technical details of IR35, which is running until 19th February 2020. The new rules are due to come into effect from 6 April 2020.

What should we do to prepare for IR35?

If you are a medium or large sized private sector client, you should:

Identify what your current arrangements are
Discuss the changes with contractors
Decide what process you will use for making status determinations – for example, do you need external support?
Consider how you are going to deal with challenges against status determinations

If you would like further advice on preparing for the upcoming changes to IR35, please get in touch with our team of employment law specialists.

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