Update to IR35 - Roll Out to the Private Sector
Updated: May 8, 2019
Original article published in The Bay Magazine Swansea (May 2019)
We have previously published an article on IR35 but wanted to update this due to the budget announcement to increase compliance with off-payroll working rules in the private sector (following the public sector implementation in April 2017). The private sector businesses will become responsible for assessing an individual’s employment status. The reform does not apply to small businesses but will impact medium and large businesses from April 2020.
IR35 is tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. Introduced in 1999, IR35 is a tax law. It is properly known as the Intermediaries Legislation and came into force in April 2000 as part of the Finance Act.
Why was IR35 introduced?
IR35 was introduced to tackle the problem of ‘disguised employment’. This is where organisations engage workers through an intermediary, rather than on an employment contract, so they become disguised employees.
This can save the engaging organisation a significant amount of employers’ NICs, and it also means they do not have to offer any employment rights or benefits. It also allows the individual to remunerate themselves using dividend payments saving on personal tax.
A common example is the ‘Friday to Monday’ phenomenon. That is when an employee leaves employment with their employer on a Friday only to return to the same role in the same office on the Monday, only engaged as a contractor or consultant trading through a personal services company. If IR35 does apply, then your business income will be subject to Income tax and National Insurance.
HMRC estimate the cost of non-compliance to the exchequer will reach £1.3 billion a year by 2023-24. The off payroll working rules only affect people working like employees and through a company. They do not apply to the self-employed.
Does IR35 apply to me?
When determining whether IR35 applies, there are three main principles to determine employment status, however significant consideration is required to ensure the correct decision is reached. HMRC has developed the Check Employment Status for Tax (CEST) service to help businesses determine whether the off payroll working rules apply.
You will need to consider;
Control – what degree of control does the client have over what, how, when and where the worker completes the work.
Substitution – the contractor should be permitted, as part of the contract, to allow someone else to complete work or parts of work in the contractor’s place.
Mutuality of obligation – the concept where the employer is obliged to offer work, and the worker is obligated to accept it.
Other things to consider are defined provision of services, contract termination, financial risk, payment, exclusivity, equipment and premises, intention.
IR35 Recent Cases
A recent high-profile case ruled that Loraine Kelly won her £1.2m tax case against HMRC over ITV work. The judge ruled she was not employed by ITV, Lorraine argued against HMRC that she was a freelancer and not an employee. The judge said ‘We did not accept that Ms Kelly simply appeared as herself – we were satisfied that Ms Kelly presents a persona of herself, she presents herself as a brand and that is the brand ITV sought when engaging her.’ It will be interesting to follow the results of other IR35 cases that are ongoing.
We have lightly touched on the topic of IR35 in this article, this will impact more and more businesses in the future. If you would like to discuss in more detail or how this could impact you please don’t hesitate to get in touch.
Allchurch & Co – Chartered Accountants
Tel: 07825 232218