The status of IR35 or off-payroll working has caused some confusion since the repeals to reforms put forward by former Chancellor Kwasi Kwarteng were subsequently scrapped by new Chancellor Jeremy Hunt.
IR35 is tax legislation designed to deal with a form of tax avoidance known as disguised remuneration, where individuals attempt to avoid paying the full rate of Income Tax and National Insurance Contributions (NICs), by providing their services through an intermediary, such as a Personal Service Company (PSC).
Engagers now responsible
The IR35 rules, which originally changed in April this year under the 2021 reforms in the private sector, exist to ensure that an individual providing services via a PSC, and who would have been an employee if they were providing their services directly to an end client, pay broadly the same income tax and NICs as a ‘regular’ employee would.
Under this legislation, all medium and large-sized private sector end clients are responsible for deciding a contractor’s employment status, as opposed to previous rules, where freelancers decided their employment status themselves.
The official guidelines for businesses affected by these rules are as follows:
- Pass your determination and the reasons for the determination to the worker and the person or organisation you contract with
- Make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
- Have processes in place to deal with any disagreements that arise from your determination.
If the determination results in a contractor being within the IR35 rules, it is your responsibility to deduct and pay tax and National Insurance contributions to HM Revenue & Customs via PAYE.
Where an employer fails to correctly identify a disguised employment scheme, the worker’s tax and National Insurance Contributions become their responsibility.
What businesses does this apply to?
According to the Companies Act 2006, a business is defined as ‘medium’ or ‘large’ if it meets two of the following criteria:
- The company has a turnover of £10.2 million or more
- The company has a balance sheet total of £5.1 million or more
- The company has 50 employees or more.
The IR35 rules are complex and onerous. If you are affected by them, whether as an employer or a contractor, please speak to us for advice.