Iain Rankin outlines the upcoming changes to the IR35 legislation and discusses what it means for those temporary workers in the private sector.
Introduced in April 2000, the intermediaries (or ‘IR35’) rules refer to two sets of tax legislation designed to combat a situation whereby services performed via a personal services company (PSC) would be classified as standard employment if the intermediary company was removed from the equation. If so, the contractor is liable to pay PAYE and National Insurance contributions (NICs) as if they were an employee.
What does the future hold?
The new ‘off-payroll’ rules (widely known as ‘off-payroll tax’) has applied to public sector organisations since April 2017. The new system has two major changes; firstly, it requires the engaging party (would-be employers) to assess the status of contractors; secondly, if any employment-style taxes are due, they must be paid in addition to the contractor’s fees.
Warning: Although the ‘off-payroll’ rules constitute separate legislation, it is also confusingly referred to as ‘IR35’.
Scheduled for April 2020, the implementation of off-payroll tax for private sector businesses was deferred due to the Covid-19 pandemic. HMRC has confirmed that from April 2021 off-payroll tax applies to the private sector, meaning any businesses still hiring individuals through PSCs will now be obliged to assess the deemed employment status of each.
For businesses with complex supply chains, each part of the chain has an obligation to relay any determinations to those further down the chain, along with supporting information. This must be completed prior to any payments being made to contractors from 1 April 2021.
In anticipation of these changes, many employers had already chosen to cease hiring PSC contractors prior to April 2020 to avoid the excess paperwork and increased risk.
Can IR35 contractors still work through a company?
While the off-payroll tax does not spell the end for contracting, operating via a PSC as a means solely to avoid tax/NICs is no longer an option. It is now impractical for many would-be employers to engage temporary workers through an intermediary PSC. However, genuine contractor companies undertaking temporary work contracts will not be affected.
The nature of temporary work has its intrinsic complications. For example, contractors working on several mixed assignments may find that one of them is considered part of IR35. Alternatively, those on short-term IR35 contracts may be expecting non-IR35 contracts in future. Since the IR35 status is considered on each separate assignment (and not on the PSC itself) such companies needn’t consider dissolution. In these cases, contractors can run payroll through their limited company to pay the appropriate PAYE taxes; alternatively, they may choose to work via an umbrella company who handles payroll on their behalf.
Of course, it bears repeating that the onus of IR35 assessment lies with the engaging client.
Summary
Although the utility of PSCs as a purely tax saving tool is undoubtedly diminished, some benefits have emerged from the changes. Contractors are no longer responsible for their own IR35 assessments, and they should see no reduction in their fees if the hiring firm decides to continue to engage their services. The last, and perhaps most crucial, point is that the would-be employer is now liable for any underpaid tax due as a result of incorrect assessment; not the contractor. This alone should provide some peace of mind to contractors, particularly for those whose contracts involve complex working arrangements.
Practical tip:
As with the old system, there is still a risk of incorrect assessment. Contractors may wish to have an independent assessment carried out by a professional if they are unsure of their IR35 status.
