Tax & admin · 21 November 2017

What is IR35 and does it affect you as a business owner?

IR35 risks
IR35 was introduced to take more tax from contractors who do not meet HMRC’s definition of self employment

Following the Treasury’s hints that tax reforms could be extended into the private sector, Business Advice asks a question on many lips – what is IR35 and who is affected by this change.

What is IR35 tax law?

IR35 was first introduced in 2000 as a way to combat tax avoidance through “disguised employment”. It dictates how freelancers and contractors are taxed when working for a public sector client.

The rules allow HMRC to “look through” an intermediary, such as a Personal Service Company (PSC), and consider whether it is appropriate for the individual to operate in PAYE and pay National Insurance contributions (NICs).

Why was it introduced?

The system was introduced because individuals contracted through an intermediary were paying less in tax and NICs than they would as a direct employee.

HMRC was concerned that contractors were abusing the “corporate” structure of intermediaries by resigning from their jobs, and returning soon after as a contracted worker with favourable tax and NIC rates.

The rumours of an extension into the public sector allegedly stem from the Treasury’s wish to level the playing field between public and private sector.

April 2017 reforms

Reforms introduced in April 2017 shifted responsibility of deciding whether IR35 was applicable away from individuals and onto the organisation.

HMRC expects the reforms to yield an extra £185m for the Treasury in the 2017/18 tax year.

Who is/could be affected?

Employee: If your roles and responsibilities as a contractor or freelancer working through an intermediary reflect that of a traditional employee, you would be subject to IR35 rules.

Employer: If you are paying individuals for their services through an intermediary, and their position is not classed as self-employed, then you would be required to make PAYE payments and NICs to HMRC on their behalf.

How does it work?

If you are considered to hold the responsibilities of an employee, the fee-payer (i.e. the organisation or agency) will calculate how much PAYE and employee NICs are payable, deduct them from the contractor fee and pay them to HMRC. 

How can I check if I am affected?

To clarify your IR35 qualification, HMRC advises using its online employment status tool.

To use the service, you’ll need to know what responsibilities you hold in your role, who decides what work needs doing, when, where and how work is done, how you’ll be paid and if you receive benefits or expenses.

If you are the end client or the agency paying the worker, you can use the employment status tool to assess their IR35 eligibility. HMRC will inform you if the responsibilities undertaken by the contractor reflect that of an employee.

Who isn’t affected?

If you are not regarded as an employee of the organisation under HMRC’s employment status test, IR35 rules do not apply.

It has been argued that extending IR35 into the private sector would be catastrophic for the economy

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ABOUT THE EXPERT

Simon Caldwell is a reporter for Business Advice. He has a BA in politics and communications from the University of Liverpool, and previously worked as a content editor in the ecommerce industry.

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