The aim of the IR35 rules when originally introduced was to ensure that individuals who work like employees but operate via an intermediary, commonly their own limited company, pay broadly the same income tax and national insurance contributions as an employee.
Under the current rules, it is for the individual’s own limited company to determine whether they should be treated as a deemed employee for tax purposes and therefore whether income tax and national insurance should be deducted from payments they receive for their services. HMRC considers that there is widespread non-compliance with the current rules.
The new rules which are due to come into force from 6 April 2020, shift responsibility for determining employee status for tax purposes on to the medium and large private sector businesses who engage the worker’s services (referred to as the end client).
The new rules will mean that where an end client has workers/contractors that operate through a limited company or other intermediary, it is for the end client to determine whether the terms of the contract and what the individuals are actually doing, means that they should be treated for tax purposes (though not necessarily for employment law purposes) like employees. The end client must take reasonable care in deciding whether or not relevant workers should be treated as deemed employees for tax purposes. Once the end client has made its determination on status, a statement must be provided to the relevant worker/contractor and any other party the end client contracts with for the supply of the worker, confirming its conclusion and the reasons behind that conclusion.
If the end client determines that the worker/contractor is a deemed employee for tax purposes, then the party in the labour supply chain responsible for paying the worker/contractor for their services (this could be the end client itself or an agency) will be responsible for accounting for the related income tax and national insurance, including the additional cost of employer’s national insurance to HMRC.
Importantly, an end client could still become liable for income tax and national insurance even in circumstances where they have fulfilled their specific obligations under the new rules and are not the fee payer. This could be the case if, for example, the fee paying agency in the labour supply chain does not comply with its obligations pursuant to the new rules in which case the liability can be transferred back up the supply chain to the end client.
There is the potential for significant income tax and national insurance costs and penalties for end clients if the new rules are not applied.
There is a lot for end clients to do to ensure that they fully understand the implications of these new rules. In particular end user businesses, if they have not already done so, should be:
If you would like advice on the changes to the off-payroll working rules (IR35), please do not hesitate to contact Sarah Illidge, Tax – Senior Solicitor on Sarah.firstname.lastname@example.org or 0114 228 3277
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.