The recent high-profile hearing involving Match of the Day presenter Gary Lineker, has thrust “IR35” into the public arena and shines a spotlight on what is seen by many as a controversial piece of employment legislation.
What is IR35?
IR35 is another name for off-payroll working rules. These rules concern the tax treatment of ‘intermediaries’ such as agency workers and self-employed contractors who set up limited companies to provide their services off-payroll.
It is designed to tackle tax avoidance by contractors working as ‘disguised employees’ and taxing them at a rate similar to if they were in employment when it comes to income tax and National Insurance (NI). It affects those contractors who do not meet the definition of self-employed and treats them as employees.
What is “Inside IR35”?
If an individual does not meet the HMRC’s definition of self-employed, then they are considered an employee of their client and therefore fall inside of IR35. They will be subject to the usual tax and NI contributions.
What is “Outside IR35”?
If an individual does meet the HMRC’s definition of self-employed then this will mean that they fall outside of IR35. They are considered to be a genuinely separate business and can be engaged with as an independent contractor. Any work paid for will be paid gross.
Who decides the status?
Since 2017, the status of the contractor working in the public sector is no longer decided by the contractor but instead must be determined by their client organisation. If the client decided the contractor was inside the IR35, the contractor company would be taxed at source, as if they were an employee. Since 2021, the same system was applied to medium or larger private sector contractors and clients too.
What was the proposed IR35 reversal?
The September 2022 mini-budget promised a reversal of the IR35 changes made from 2017 and 2021. It was said that, notwithstanding whether the contractor was working in the public or private sector, the contractor would once again be responsible for determining their own employment status and paying the appropriate tax and NI under IR35.
Like many of the promises in the mini-budget, however, this one was not kept. It was announced in October that the reversal would no longer be going ahead. So, today, it remains the end user’s responsibility to apply any IR35 to their contractors.
What is the current IR35 position?
All public authorities and medium and large-sized private sector clients are responsible for deciding if the rules apply. If a worker provides services to a small business client outside of the public sector, the worker’s intermediary remains responsible for deciding the worker’s employment status and if the rules apply.
What is the small business exemption?
An exemption still applies to end users who are classified as ‘small businesses’ as defined by the Companies Act 2006. To fulfil this, they need to meet two or more of the following criteria:
- The Company’s annual turnover is no more than £10.2 million
- The Company’s balance sheet total is no more than £5.1 million
- The Company employs 50 employees or fewer
What does this mean for businesses?
The time and money that businesses spent in making the necessary changes to prepare for the original IR35 change will not be wasted.
Those companies who engage workers through a third-party intermediary such as an agency should continue to examine their contractual relationships with the agency and the workers it supplies to them for services. While the end-user clients will determine the IR35 status, the tax, and NI responsibility will still lie with the employment agency. But should the agency for whatever reason be unable to pay those dues to HMRC, the liability falls back to the client. This could leave such businesses exposed to significant future financial risk.
Medium and large-sized businesses will need to produce a Status Determination Statement (SDS). This is a written statement prepared by a business that states the employment status of a contractor with whom they engage. So, they are required to conduct an assessment and produce an SDS for any contractors they engage through an intermediary. The SDS should identify all the parties involved i.e. the contractor, the wage payer and the end user. It should show the business’ finding as to whether the individual is an employee or independent contractor, including the reasons for that finding.
The SDS finding can be disputed so the business should set out the process for how they can appeal your determination.
How 3CS can help
If you need help determining whether IR35 applies to your contracts or to assist with self-determination statements, please get in touch with your usual 3CS contact.
