what is IR35?
IR35 is the common name given to the intermediaries legislation. That is the legislation governing the tax status of individuals who provide their services through an intermediary, such as a limited company (commonly known as a personal services company or a PSC).
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IR35 explained.
IR35 is a set of tax reforms first unveiled in 1999 by the Inland Revenue. The reforms mandate that medium and large businesses in the U.K. determine if the IR35 rules apply to their contractors and freelancers. Previously this was determined by the contractors themselves.
IR35: what has changed?
New IR35 legislation that was introduced in April 2021 was designed to enable more effective enforcement of existing rules, shifting the compliance burden to clients. For example the change allows HMRC to pursue one company in respect of 200 contractors, rather than carrying out 200 individual contractor investigations.
IR35 targets individuals that provide their services via an intermediary, most commonly a limited company.
Under the current IR35 rules, these individuals assess each contract and determine whether IR35 applies. When it does, income received from that contract should be treated as employment income. This means it’s subject to tax deductions and national insurance contributions.
As of April 2021, the responsibility for making this IR35 determination falls to the end-user of the services (typically employers that engage contractors). The organisation paying for the services will be responsible for making the relevant deductions.
IR35 is here. are you compliant?
The HMRC has the authority to investigate the tax compliance of organisations, and this allows them to explore the employment status of any off-payroll workers providing their services to private sector clients.
Where it is found that an individual has been incorrectly categorised as being outside of IR35, the HMRC will issue a determination requiring the unpaid PAYE tax and National Insurance Contribution liabilities — including any late payment fines and interest — to be paid.
In addition to these fines, HMRC has the discretion to issue a penalty ranging from 0-100% of the initial outstanding liability. If an incorrect determination has been made in the absence of reasonable care, it is likely that a severe penalty would be awarded alongside the unpaid taxes.
It is clear that non-compliance with IR35 can bring with it potentially crippling financial implications. It’s critical that you get up-to-speed to avoid any unwanted penalties.
achieving IR35 compliance
Your business has likely already seen so much disruption over the past two years, and IR35 may be an unwanted distraction that you are yet to engage with. Our team of experts can assist you by providing a tailored solution to safely and efficiently manage you through the changes to avoid unnecessary disruption.
Why Randstad Sourceright?
- Our partnership means you will hear the latest HMRC IR35 guidance and important changes from us first.
- You benefit from our wealth of experience implementing IR35 solutions within the across sectors.
- We have a proven track record; you’ll be working with the world’s leading HR services provider.
learn more about our IR35 programme management services.
FAQs
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Why did HMRC roll out IR35 across the private sector?
- to eliminate the possibility that two individuals doing the same job are paying the same level of tax
- to adapt to a constantly changing flexible labour market and subsequent emerging business models
- to easily and effectively eliminate widespread non-compliance by providing a universal framework for assessing employment status
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Who is in scope?
- the greater the level of control placed upon the PSC, the more likely that IR35 applies
- any contractor whose working practices and engagement is considered, for tax purposes, as employment with the end client
- contractors carrying out the engagement who are not allowed to operate using their own business
The legislation applies only to medium or large businesses. There’s an exemption for small businesses, which means meeting two or more of the following criteria (if not part of a larger group):
- annual turnover is no more than £10.2 million
- balance sheet total is no more than £5.1 million
- no more than 50 employees
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Who is exempt?
- those operating under a limited company, who are carrying out an engagement not deemed as employment by the end client
- any engagement that is aligned to the running of a business, for example, buying a service
If the PSC can supply a different person to do the work, it is less likely that IR35 applies. If the worker can be substituted for another, then that element of personal service would not exist.
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As an employer, what should my objectives be?
- ALWAYS remain compliant to tax legislation and demonstrate best practices
- demonstrate ethical and fair payment practices where similar roles attract the same employment taxes
- avoid increasing costs for staff based on “uplifting” day rates to compensate for increased tax payable by the contractor
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PSC (personal services company) or contractor?
When referring to contracting, a limited company normally consists of a sole shareholder and director through which services are provided. Although IR35 applies to services provided through any intermediary that is not an agency, the most common model is via a limited company (a PSC). Tax is the responsibility of the PSC that employs the contractor.
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Who is the end user?
The end user is the organisation benefitting from the services provided by the PSC.
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Who is the fee payer?
The organisation paying the PSC for the services will be responsible for paying the associated fees. This may be the same organisation as the end user or another party — such as an employment business.
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What is Mutuality of Obligation?
Mutuality of obligation is a term you will often come across when going through the IR35 compliance process. Mutuality of Obligation, put simply, is the employer’s obligation to provide work, and the employee’s obligation to accept that work.
This is a necessary feature of the relationship between an employer and an employee. Even where a worker is obliged to provide their own skill and be paid, IR35 doesn’t necessarily apply — an element of control must be present in the relationship.
As an employer it is important to consider the following questions:
- Is the individual obliged to provide their own skill and expertise or can the PSC engage a substitute?
- Is the end user obliged to pay for work carried out or does the PSC take some financial risk?
- Does the worker provide the materials and equipment or premises to discharge the work and are they responsible for fixing any unsatisfactory work in their own time at their own cost?
- Does the worker only work for the client and/ or are they responsible for the success or failure of their business, which can make a loss or profit?
how can we help?
- by ensuring best practices and IR35 compliance for both our clients, and as a market leading managed service provider (MSP)
- providing trusted subject matter expertise and guidance
- offering tailored solutions fit for any business
- simplifying complex processes, unravelling jargon and ensuring clear understanding
- let your hiring managers focus on their day jobs, let us take the strain of IR35
- providing SOW services procurement services to broaden talent access
the time is right for SOW services procurement.
With Ltd. Company contractors facing greater financial obligations under IR35, you can expect that more will seek alternate working arrangements more often. How can you access the talent you need and get work done in a compliant way?
Statement of work (SOW) services align closely with the key tenets of IR35: supervision, direction, control, right to substitution and mutuality of obligation. But it takes the right technology, expertise and processes to manage SOW services procurement compliantly and efficiently.
about SOW management5 quick tips for IR35 success.
get focused on IR35 compliance to reduce your risk.