What is IR35?
The IR35 legislation came into force with the Finance Act of 2000. Its purpose is to determine if contractors are “disguised employees” and therefore liable for full PAYE and National Insurance via deemed salary.
At the end of May 18, HMRC issued their consultation on off-payroll working (also known as IR35) in the private sector. This follows on from the IR35 changes to the public sector that were enacted from April 2017. The consultation is an opportunity for stakeholders to provide relevant insight and recommendations.
Recent changes surrounding IR35
Following the introduction into the public sector in April 2017, HMRC claim that IR35 in the public sector increased compliance and the amount of taxes collected. This is the primary driver for HMRC to cast the net wider to further increase tax collections.
The validity of HMRC’s claims is widely disputed by industry professionals and contractors alike. The rules were intended to be applied on a case by case basis but ill equipped and under resourced public bodies meant blanket assessments have been widely reported.
Furthermore, there has been controversy surrounding HMRC’s CEST (Check Employment Status for Tax) tool with many professional bodies, such as the Institute of Chartered Accountants in England and Wales, deeming it not fit for purpose.
What was the impact of IR35 in the public sector?
Historically it was for the personal service company to establish whether they were inside (caught) or outside IR35. The changes moved the burden of assessment from the personal service company to the public sector body engaging that personal service company.
Clearly the level of work involved in assessing the status (looking at the usual IR35 indicators) was not a viable option for already stretched public sector entities. This resulted in most bodies essentially deeming everyone inside IR35.
Where a personal service company has been assessed by their customer as inside IR35, the net invoice amount will be subject to PAYE and National Insurance (calculated and deducted by the engager) without the 5% expense allowance normally given for companies caught by IR35.
IR35 Off Payroll Working in the Private Sector
The chancellor has announced that the private sector reform of IR35 will take place in April 2020. As it stands, it is the contractor’s responsibility to determine whether they are operating inside (also known as caught by) IR35 or outside IR35. If the contractor makes the wrong determination then their personal service company is liable for any unpaid taxes.
From April 2020, medium and large businesses will need to decide whether the rules apply to an engagement with individuals who work through their own company. Where it is determined that the rules do apply, the business, agency, or other third party paying the worker’s company will need to deduct income tax and employees National Insurance Contributions and pay employer National Insurance Contributions.
This means that from 2020 your end client will have to undertake an IR35 assessment for each assignment you undertake with them and decide whether you are operating inside or outside IR35. We will release further information on this as the detail is released from the government. In the interim ICS can carry out a contract review (reviews are free if you are on a standard package of £125+VAT and above, otherwise it is £100+VAT per review) and are happy to discuss your working practices.
Recent IR35 case
Just days before the consultation was released HMRC lost an IR35 appeal case brought by Ian Wells. Wells was a business analyst providing services though a personal service company, Jensal Software Ltd, via agency Capita Resourcing, to the Department of Work and Pensions (DWP).
The judge ruled that the contract was a contract for services not a contract of service and therefore belonged outside IR35. HMRC unsuccessfully argued that the assignment was inside IR35 due to the fact Jensal did not appear to have sufficient autonomy of the work being provided to the DWP.
The judge disagreed with HMRC’s point on control and further disagreed with HMRC’s interpretation of mutuality of obligation (MOO) – the obligation of an employer to provide work and pay for it.
The fact that HMRC’s CEST tool ignores MOO yet they have just lost a case where it is clear they don’t understand it further contributes to doubts over HMRC’s capability of applying and policing off-payroll working legislation.
ICS Accounting are expert accountants with extensive experience within the contractor market. For more information on the IR35 changes, as well as any accounting or taxation matters, please contact our New Business team on firstname.lastname@example.org or call 0800 195 3750.