In April 2021, reforms to IR35 will be implemented in the private sector. The following is a brief introduction to IR35 and the possible impact the upcoming legislative reforms will have to contractors.
In April 2000, IR35 tax legislation was introduced into the UK. The legislation was designed to better identify whether the contractors who are supplying their services via an intermediary, such as a Personal Service Company (PSC), should in fact be registered as an employee for tax purposes. These contractors are often referred to as ‘disguised employees’ by the government.
Historically, determining IR35 status was the responsibility of the contractor. In April 2017, legislative changes took effect in the public sector which shifted the responsibility for determination away from the contractor to the relevant end-client.
IR35 reforms are now expected to be implemented in the private sector from April 2021 (following delays to the original April 2020 deadline due to the disruption caused by COVID-19). The reforms mean that the end-client will be responsible for determining the IR35 status of the role instead of the contractor.
These reforms will only apply to medium and large businesses, while small businesses will be exempt. According to the Government, a business qualifies as ‘small’ if the following conditions are met: i) turnover is not more than £10.2 million, ii) balance sheet total is not more than £5.1 million, and iii) number of employees total no more than 50 (Companies Act 2006).
The IR35 rules allow HMRC to scrutinise the contractual and working arrangement of the contractor in order to identify ‘disguised employees’.
If HMRC determines someone is acting as a disguised employee, they are deemed to be ‘inside IR35’ for tax purposes and are liable to pay employee related taxes in respect of the remuneration they received for their work. If found to be inside IR35, the individual may also face tax assessments, penalties and accrued interest. In other words, to be considered ‘inside IR35’ means that the contractor will be treated as an employee for tax purposes and therefore subject to PAYE (pay-as-you-earn).
To be considered ‘outside IR35’ means that the contractor is not treated as an employee for tax purposes but instead operating as an independent business.
When IR35 was first established, the onus was on limited company contractors to determine whether they were inside or outside IR35 regulations and pay the relevant taxes. HMRC’s position is that this has resulted in many contractors incorrectly determining their status.
When the IR35 reforms are rolled out to the private sector in April 2021, responsibility for determining whether a role falls inside or outside IR35 will shift from the PSC to the end-client.
If the role is determined to be inside IR35, the contractor will be deemed a disguised employee of the end-client and therefore liable for income tax and employee National Insurance Contributions (“NICs”) which is higher than the effective tax rates under the PSC structure.
If HMRC determines someone is acting as a disguised employee, the individual may also face tax assessments, penalties and accrued interest.
IR35 legislation itself is not new and has been around for some time. What is new is who is responsible for determining whether a role sits inside or outside IR35. Aston Carter is working closely with our clients to help them prepare for the upcoming reforms to the legislation. If you have any concerns or would like to discuss IR35 in more detail, please contact your Aston Carter representative who will be happy to help answer your questions.
The above information is intended for general information and guidance only. We recommend that you obtain specific and detailed independent advice from a specialist lawyer and tax adviser who has expertise in IR35.