IR35 – everything you need to know about the off-payroll working regulations

New changes are set to come into force in April 2019 that will affect individuals and contracts that provide personal services through an intermediary for medium-sized and large businesses.

The aim of the new IR35 legislation is to prevent individuals from reducing income tax and National Insurance Contributions through what HMRC consider as ‘disguised employment’, where an individual provides their services through a personal service company (PSC) and receives payment in the form of low salary and dividend income.

The IR35 rules will operate a system dependent on whether the end-client of the contract worker is either a small private sector organisation or a medium/large organisation in the private sector.

Engaging with a small private sector organisation

In situations in which contractors are engaged with a small business, there are no changes and responsibility for compliance with IR35 will remain with the PSC.

Engaging with a medium or large organisation

If a contractor is engaged with a large or medium organisation, then it will be the responsibility of the large or medium-sized organisation.

This was previously brought in for the public sector in April 2017 and saw a lot of contractors having to make the choice between either becoming an employee or looking for a new role.

This shift in responsibility moves the decision of deciding whether the rules apply away from the individual’s PSC, to the organisation that is the end-user of the worker’s service. Responsibility for deducting the associated employment taxes and National Insurance contributions will rest with the Final Payer making the payments to the PSC.

How does this affect contractors?

Contractors should review their current situation and see whether they fall inside or outside of IR35. When reviewing this deemed employment status, it is important to consider the following factors:

  • The level of integration into the end-users business (whether the worker is in effect treated as though they were an employee)
  • Does the worker have the right of substitution or is obliged to perform services themselves?
  • The level of supervision, direction or control the end-user is able to exercise over the worker when carrying out their duties
  • Mutuality of obligation: is the end-user obliged to offer work and, if so, is the worker obliged to do it?

How does this affect medium or large businesses?

From 6 April 2020, medium and large businesses will be responsible for deciding the employment status of workers, and they will need to communicate this to the person or organisation they work with.

It’s important to keep records of your employment status determination, including reasons and fees paid.