An introduction to “Off-Payroll” Working (IR35) Regulations.
Affects taxpayers providing services to their client or clients via an “intermediary” such as their own private company “service company”.
The Off-Payroll Working Rules
The off-payroll working rules, often referred to as “IR35” regulations, can apply if a worker, sometimes known as a contractor, or subcontractor, provides their services through their own limited company or another type of “intermediary” to their client or clients.
An “intermediary” is most commonly the worker’s own personal service company, but could also be any of the following:
a personal service company
The rules are intended to ensure that workers pay broadly the same Income Tax and National Insurance contributions as employees where the worker would have been an employee if they were providing their services directly to the client, i.e. not through their own personal service company or other “intermediary”.
But for companies with only one director the additional sting in the tail that many commentators think is the extremely unfair bit is that as your own “employer” your company would also be required to pay “employers” National Insurance, in addition to the “employees” tax and national insurances.
One of the reasons these rules are seen my most commentators as extremely unfair is that the combined employees and employers taxes will quickly add up to potentially around 50% which, even as a basic rate taxpayer, so actually the taxes are far in excess of what any employee would pay in the same situation.
Furthermore employees get holiday payment, pension rights and other benefits that people running their own small company don’t get which is why the IR35 regulations are so unpopular, and seen to be very unfair.
“A sledge hammer to crack a nut” and HMRC can be very nasty along the way.
A number of working factors are taken into account by HMRC to decide if a worker would be deemed to be caught by IR35 including:
These are known as the principal ‘tests of employment’:
What degree of control does the client have over what, how, when and where the worker completes the work?
Is the work or service required by the worker themselves, or can the worker send a substitute in their place?
“Mutuality of obligation” is a concept where the employer is obliged to offer work, and the worker is obligated to accept it.
There are other factors that are taken into account to determine whether you are caught by IR35 including:
the contract type
whether you are taking a financial risk
are you ‘part and parcel’ of the engager’s organisation
“in business” on your own account (e.g. trappings of a business such as advertising, website, stationery, offering services out to others not just this person or business paying you,
provision of equipment or tools to do the job (i.e. you provide or the “payer” does)
HISTORY OF IR35 & “Off-Payroll” Working Rules
These rules are sometimes known as ‘IR35’ but why “IR35“? It is also knowns as the “intermediaries legislation”. HMRC used to be known as the “Inland Revenue” number their press releases, usually in the bottom left hand corner of he document. IR35 was the 35th press release from the Budget on 9 March 1999 in which the Government outlined the plan to clamp down on “one-man-band” companies where the individual was working in a similar manner to the way they would if they were actually an employee of the personal or business they are working for.
On 23 September 1999 HMRC issued a revisions to the original press release.
“IR35” became law in April 2000 via the Finance Act 2000, Schedule 12 and has remained on the statute books ever since, despite being extremely unpopular legislation and widely criticised. HMRC can be extremely heavy-handed when it comes to IR35.
Over the years the rules have evolved.
The income tax element of the Intermediaries Legislation has subsequently been integrated into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), and the NICs element into the Social Security Contributions (Intermediaries) Regulations 2000.
In April 2017 the Government introduced the “Off-Payroll Reforms”, which is a separate piece of new tax legislation that applies to the public sector, but which is also confusingly often referred to as “IR35.”
From 6 April 2017
Public authorities became responsible for deciding if the rules applied where they contracted workers who provide services through their own intermediary.
From 6 April 2021
All public authorities and medium and large-sized clients outside the public sector are responsible for deciding if the rules apply.
If a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and if the rules apply.
Who the rules apply to
You may be affected by these rules if you are:
a worker who provides their services through their intermediary
a client who receives services from a worker through their intermediary
an agency providing workers’ services through their intermediary
If the rules apply, Income Tax and employee National Insurance contributions must be deducted from fees and paid to HMRC. In addition, employer National Insurance contributions and Apprenticeship Levy, if applicable, must be paid to HMRC by the person who pays the worker’s intermediary.
You can use the Check Employment Status for Tax service to help you decide if the off-payroll working rules apply.
An individual’s employment status for tax determines the taxes the worker and client, or the person paying the worker’s intermediary need to pay, depending on whether a worker is employed or self-employed.
When the rules apply
The rules apply if a worker provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly.
A contract for the purpose of the off-payroll working rules is a written, verbal or implied agreement between parties.
The off-payroll working rules apply on a contract-by-contract basis. A worker may have some contracts which fall within the off-payroll working rules and some which do not.
The consequences of IR35 is that you would have to apply “payroll taxes” to the majority of your income from any contract or work caught by IR35, as opposed to say, taking that income as dividends from your company.
Articles of Association
Companies are run within the terms and guidance of their “Articles of Association”.
Companies House Legislation
Companies also have to operate within the Government legislation governing Limited Companies.