The off-payroll working rules known as IR35 have been controversial since they were first implemented – and even more so after being reformed in 2017 for the public sector and 2021 for the public sector.
Those reforms were almost scrapped as part of then-Chancellor Kwasi Kwarteng’s September 2022 mini-budget, but this decision was reversed by his successor Jeremy Hunt.
As it stands, the reformed version of the rules remain in place, which means businesses engaging the services of workers through an intermediary should be aware of their compliance responsibilities.
What is IR35?
IR35 is the name commonly used for a set of tax rules that apply to ‘off-payroll working’. They aim to prevent tax avoidance by workers who provide their services through an intermediary, but who otherwise work in much the same way as employees. This means contractors working through limited companies are often affected by the rules.
As of recent reforms in 2017 and 2021, it’s the responsibility of the client engaging the worker’s services to identify whether they fall ‘inside’ IR35 (that is, they’re effectively classed as an employee for tax purposes) or outside of the rules. If a worker is inside IR35, their pay needs to be taxed in the same way as an employee’s.
Small companies in the private sector are exempt from this reform, however, and can engage the services of contractors without being responsible for determining their employment status for tax purposes.
A company is considered small if it meets two or more of the following conditions:
- an annual turnover not exceeding £10.2 million
- a balance sheet total of no more than £5.1 million
- no more than 50 employees.
What you need to do as a client
Unless you fall under the definition of a small company listed above, you’re responsible for determining your workers’ employment status for tax, and making sure they pay the right amount of tax and National Insurance.
The Government has outlined the following nine steps you should take to stay compliant with IR35:
1. Assess your workforce
Look at your current workforce and identify people who supply their services through an intermediary: this might be a contractor working through a limited company, or someone contracted through an employment agency.
You should have a process in place to identify those workers in future.
2. Talk to workers and agencies about IR35
Make sure everyone understands the rules and how they might be affected. HMRC provided this factsheet for contractors when the rules changed in 2021, which you could use to inform individuals working for you.
At this stage, you might also need some information on the way people work to be able to make the right determination.
3. Determine whether IR35 applies
Once you’ve looked at your workforce and gathered all the information you need, you’ll need to make a status determination for any workers that might fall within the rules.
You can do this using HMRC’s Check Employment Status for Tax (CEST) tool.
It’s a good idea to designate one person in your organisation to make these checks – and to decide how you’ll escalate cases that are hard to identify.
4. Tell the worker the outcome
When you’ve reached an outcome, you’ll need to tell the contractor (and any agency you engage with) using a status determination statement.
5. Pay the right amount
If you operate PAYE for the worker, you need to put processes in place to deduct the right amount of income tax and employee National Insurance contributions (NICs) going forward.
You will also be responsible for paying employer NICs and the apprenticeship levy, if it applies to you.
6. Deal with disagreements
In some cases, contractors might disagree and appeal against your status determination. You’re legally required to have a process in place to deal with these disagreements.
7. Keep records
Another legal requirement is to keep records about IR35 determinations, disagreements and more.
8. Test your processes
Keep testing your processes, systems and controls to make sure they work, so you can be sure you’re making the right decisions.
9. Revisit if things change
Over time, your working practices might change – or you might amend or renew contracts, or create new ones. In these cases, it’s important to check whether your previous IR35 determination still applies by following the processes you’ve put in place.
What you need to do as a contractor
If you’re working through a limited company for a small client outside of the public sector, you’re still responsible for applying the IR35 rules and determining your own employment status. Again, CEST can help you with this.
Factors affecting IR35 status
HMRC’s internal manual includes the following list of factors that might affect IR35 status. Although it notes this list is ‘non-exhaustive’, it can be helpful to bear in mind when assessing contracts:
- control
- personal service
- equipment
- financial risk
- basis of payment
- mutuality of obligation
- holiday pay, sick pay and pension rights
- part and parcel of the organisation
- right to terminate a contract
- opportunity to profit from sound management
- personal factors
- length of engagement
- intention of the parties
Get in touch for advice on applying IR35 as a client or contractor.