IR35 is a section of legislation that permits HMRC to collect extra payment where a contractor is an employee in all but name. If a contractor is operating through a third-party, such as a limited company, and if it wasn’t for that third-party, they would be an employee of their client, IR35 kicks in.
The IR35 legislation was brought in to force to tackle loss of tax revenues from people providing their services through an intermediary. This meant that they paid themselves mainly in dividends rather than a salary and both the individual and the user of their services profited from a more positive tax regime that avoided employee income tax (‘PAYE’) and employer and employee National Insurance (‘NI’) contributions.
Before now, the guidelines provided by IR35 meant that the third-party or intermediary company would be responsible for PAYE and NI, but if this company was taken out of the equation then ultimately the user and the individual working would have the employment relationship instead.
This meant the Government recovered less tax from the original IR35 regime and decided they needed to reconsider the rules. This brought a change in the IR35 legislation. Rule changes were presented in the public sector in 2017 and from 6 April 2020 will cover any large and medium sized businesses in the private sector. From that date the company who is the recipient of the individual’s services, or the intermediary paying the PSC (People with Significant Control), will become accountable for PAYE and NI, rather than the PSC itself.
What does this mean for you?
If you are an organisation that uses contractors – how the IR35 will affect you
The revised IR35 rules indicate that private sector companies big enough to be counted in by the rules may become responsible for PAYE and NI on the fees paid to individuals who are working for them through PSCs. If the change in IR35 rules apply to your organisation, then you need to prepare for April 2020.
Agencies may in some situations be liable to run PAYE on behalf of clients for contractors who have been recognised by the client as self-employed.
Your business may also find itself in a dilemma between contractors you’ve taken on board who don’t want to be reclassified and clients who wish to keep safe from penalisation and want only to abide by the new legislation.
If you are an agency – how does the new IR35 affect you
Agencies who are involved in providing consultants to other companies, instead of just making a recommendation to use them, will find that they are responsible for PAYE on payments made to PSCs. You’ll need to prepare for April 2020 if this applies to your agency.
Agencies may in some scenarios be liable to operate PAYE on behalf of clients for contractors who have been classified by the client as self-employed.
If you are an individual
Individuals working through a PSC should prepare for the impact of the new rules, which could have a substantial bearing on your level of payment.
The new rules can mean that you will be requested to be reclassified from a self-employed contractor to a working employee for tax reasons which in turn could mean you are paid less.
We are seeing more and more clients of consultants who work through PSC’s taking a ‘blanket’ approach to safeguard themselves and reclassifying their consultants as employees for tax purposes so that they will not be faced with any penalties come 2020 – it is because there will be very little time to prepare if the Government confirm the details of the new rules.
Similarly, you should be thinking about the steps you can take to avoid a penalty.
How does MAR Legal help?
If you are concerned about the effects of the IR35 changes and what this may mean for your business, MAR Legal can help you:
- Help you to understand how the new rules affect you
- Commence an audit of the contractors and clients with whom you currently work to assess what changes (if any) need to be made
- Look at your business model and documentation;
- We can advise who will be liable to make the payment of PAYE and NI in your unique set-up
- We can help you to legally find a compliant solution that will favour all involved.
To discuss the IR35 with MAR Legal contact us