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March 4, 2020
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Going Private - IR35 from April 2020

NOTE: The changes to IR35 as described in this article have been delayed until April 2021

 

The off-payroll working rules (commonly referred to as IR35) were introduced in April 2000 to prevent individuals/contractors from providing employment services to clients through an intermediary (e.g. limited company or partnership) in order to reduce or avoid PAYE and National Insurance contributions (NICs).

The intermediary comes within the scope of IR35 where the worker would be treated as an employee of the client but for the existence of the intermediary. IR35 is therefore designed to catch ‘one-man’ companies who contract almost exclusively for one major client.

When IR35 applies, the income of the intermediary is regarded as the worker’s earnings from employment, and the intermediary will be required to operate PAYE and the worker will be subject to income tax and NICs on their deemed employment payment.

What's Changing?

Since 6 April 2017, public sector employers, agencies, and third parties have been responsible for determining whether their workers fall within the scope of IR35, operating the rules, making the relevant deductions of income tax and national insurance in respect of the worker's pay, and paying this to HMRC.

From April 2020, the same IR35 rules will be extended to private sector contractors, thereby bringing them in line with the public sector.

An exemption from these rules applies for "small" organisations, which includes businesses that meet 2 or more of the following criteria:

  1. Turnover - not more than £10.2 million
  2. Balance Sheet total - not more than £5.1 million
  3. Number of employees - not more than 50

Where the end-client satisfies the criteria, responsibility for determining and applying the IR35 remains with the intermediary.

It should be noted that the new rules cannot be avoided where, for example, medium/larger businesses set up "small" organisations to contract directly with the workers i.e. to meet the above criteria. The new rules will look through such structures at any connected organisations when applying the criteria.

What Should I Do?

If you come within the definition of a small business above, then you will not need to do anything.

However, if you are a medium or large business and you engage with a personal service company, as the end client you are responsible for deciding the employment status of the worker and operating IR35 correctly.

If you need help checking the worker's employment status, HMRC has published an online tool to assist with this.

Alternatively, you can seek the services of a tax expert in order to help you determine the status of your workers and set out your compliance obligations.

Related Articles

Service with a Smile – Consultation on Off-Payroll Working (IR35) in the Private Sector (29 May 2018)

Ackroyd v HMRC - The End of the Road? (11 November 2019)

Ackroyd v HMRC - Nothing Personal (29 March 2018)

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