KPMG · 14 June 2017

Avoid new tax trap: Beware IR35 legislation affecting contractors and freelancers

Do you understand the changes to IR 35 rules?
Do you understand the changes to IR 35 rules?
KPMG Small Business Accounting has put together a guide to navigating taxation to help cut through the noise – particularly IR35 legislation.

For contractors and freelancers who provide services to a public sector body via an intermediary such as a Personal Service Company, the rules on PAYE and NICs have changed. This is due to the updates on the IR35 legislation introduced on 6 April.

Previously, the contractor was responsible for determining if the IR35 legislation rules applied and the intermediary was responsible for operating NIC and PAYE. Now, the public sector bodies will take responsibility for deciding whether these rules apply.

It is important to note that not all contractors and freelancers will be affected by these changes. The changes should not affect you if the end user of your services is not a public sector organisation.

To help contractors and freelancers better understand this tricky legislation, KPMG Small Business Accounting has put together this guide outlining responsibilities.

What is IR35?

The IR35 legislation rules were introduced in 2000 to combat “disguised employment”, where organisations engaged individuals through an intermediary (such as their Personal Service Company).

“Seeing as the organisation which engaged the intermediary was not required to operate PAYE and NIC, the IR35 rules allowed HMRC to ‘look through’ the intermediary and, in cases of ‘disguised employment’, require the intermediary to operate PAYE and NIC,” explained Bivek Sharma, head of KPMG Small Business Accounting.

“The move to ‘look through’ the intermediary was because, by using a corporate structure, individuals were typically paying less tax and NICs than they would have done as a direct employee. In particular, HMRC’s concern was that some employees were resigning from their jobs one week only to be engaged the next week as a freelancer or contractor doing the same job but with less tax and NICs being paid to HMRC.”

The rules aim to identify those who would be classed as employees if they were not operating through an intermediary. The latest changes are expected to yield an extra £185m during the 2017/18 tax year, according to HMRC.

What next?

You can check your employment status for tax on the government website [https://www.gov.uk/guidance/check-employment-status-for-tax] to find out whether the rule changes are likely to affect you.

To use the service, you will need to know what responsibilities you have 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 suspect your public sector client has wrongly judged you to be affected by IR35 legislation, KPMG Small Business Accounting advises speaking to them about it in the first instance.

If you believe that PAYE and NIC has been wrongly deducted from payments received by your intermediary, you have the option of submitting a repayment claim to HMRC, which will make a judgement.

Deciding whether someone is caught in the IR35 rules can be complicated and some organisations may be erring on the side of caution as there are penalties for non-compliance.

However, whatever your personal circumstances, if in doubt it’s always advisable to speak to a professional. Your accountant should be able to talk you through the rules and how they impact your situation.

To find out more, read the guide from KPMG or speak to your accountant.

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ABOUT THE EXPERT

Letitia Booty is a special projects journalist for Business Advice. She has a BA in English Literature from the University of East Anglia, and since graduating she has written for a variety of trade titles. Most recently, she was a reporter at SME magazine.

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