What is IR35?
The off-payroll working rules, or IR35 as it’s commonly referred to, have been around for some time. The rules exist to ensure that in circumstances where a worker or contractor meets the definition of an employee, that worker pays broadly the same income tax and National Insurance contributions to that of a PAYE employee. It still remains important to understand the rules and how they impact your business, given the risks of an HMRC investigation and the financial penalties of getting it wrong.
Changes to IR35 rules in recent years
The process of determining whether IR35 status applies to a business has not changed. The rules apply if a worker or contractor who is providing services to a client through an intermediary company (or personal service company – ‘PSC’) would or should have been an employee if they were providing services directly to that client.
The rules regarding who must determine employment status changed on 5 April 2021 (postponed from 5 April 2020).
It remains the case that where IR35 applies, and a worker is providing services to a client through their PSC and their client qualifies as a small company, then the obligation to apply the IR35 rules and pay appropriate taxes falls on the PSC itself.
Where the client is a medium or large company, or any public sector organisation, the obligation to determine whether IR35 applies rests with the client. The client must then apply the rules and deducted appropriate taxes from the workers’ pay and pay this to HMRC.
In practice this has led to a number of medium and large clients insisting on employment contracts to avoid the risk altogether of falling foul of the IR35 rules.
It is worth noting that agencies (or ‘umbrella companies’) who supply workers to clients will have responsibilities under IR35 if the agency is the deemed employer. This will happen where an agency supplies workers not directly employed by the agency to any public sector client, medium and large sized clients, or another agency.
Due diligence of the supply chain is essential to protect against HMRC transferring the debt to other businesses where an agency or umbrella company has failed to apply PAYE correctly.
Who are HMRC targeting?
Alongside high profile cases targeting TV personalities and entertainers, HMRC will target industries where engaging with umbrella companies or freelancers who use PSCs is or was commonplace.
For example, workers in IT, computing and technology, and healthcare workers, are at risk of being targeted due to the prevalence of PSCs in these industries. Construction is another target area due to the use of contractors.
In recent years HMRC have written to oil and gas and banking and finance sectors to confirm compliance. HMRC do also collaborate with other government departments, for example they have an agreement with the Security Industry Authority to share information in order to combat tax fraud as well as other potential illegal working practices in the security industry.
HMRC may also write to you if you have used an umbrella company that is not operating PAYE correctly and you have knowingly or unknowingly been part of a tax avoidance scheme.
This list is not exhaustive, and if you have not yet considered whether IR35 applies to your business but you either work via an intermediary company or you engage intermediary companies then do not delay in consulting a professional who can advise on whether the rules apply and how to be compliant.
What should I do if I get it wrong?
HMRC’s CEST tool exists to help you determine your employment status, and therefore whether the IR35 rules will apply. But a word of caution – the tool has its limitations and it cannot take into consideration every unique factor that applies to you, your business, or any workers you engage.
Menzies has a team of tax experts who can provide advice on whether IR35 applies and how to apply the rules, what to do if HMRC write to you, and how to correct any historic errors if you should have been applying the rules but have not been.
