What are some key points to note when considering the IR35 regulations?
In broad terms, IR35 rules apply where:
- An individual personally performs services for a client (or is obliged to do so).
- Those services are provided under arrangements involving an “intermediary”
- The circumstances are such that if the arrangements had been directly between the individual and the client, the individual would have been regarded as “employed” for income tax and national insurance purposes
Where the legislation is engaged, the worker and the intermediary are treated as employee and employer for income tax and national insurance purposes.
One of the key questions under the legislation is whether the worker would (for tax or NICs purposes) have been an employee of the client if they had been working directly for it. This can be tricky to determine – see our separate guidance note on employment status. If the answer is no, then the intermediary and the worker will not be caught by the IR35 rules.
HMRC includes guidance on the factors that it considers to be the most important in determining an individual’s employment status. Whilst the guidance stresses that the factors it lists are not exhaustive, and that the overall picture must be looked at, it identifies the following factors as being the most important:
- An obligation to provide personal service
- Mutuality of obligation – to provide work/skill and to be paid for that
- Right of control by the recipient of services, even if this is not exercised in practice
- A right for the individual to provide a substitute and/or to engage helpers. A right of substitution points away from employment status but is not, by itself, determinative
- Provision of own equipment by the individual
- Financial risk being taken by the individual (e.g. by paying for their own training) and/or an opportunity to profit
- Integration into the recipient organisation
- Provision of similar benefits to those provided to employees
- Mutual intention of the parties (e.g. that the individual is not an employee) – though this is not determinative
In March 2017, HMRC made available an online tool to check employment status for tax to determine whether, if the contract were directly between the worker and the end client, the engagement would have the nature of employment.
Case law makes it clear that the reality of the situation is crucial when determining employment status – it is not just a matter of what any written contract says (although that can be very important).
With effect from 6 April 2017, all payments made to personal service companies by public authorities (or in relation to contracts with agencies and third parties that contract with the personal service company to supply the services of a worker) are subject to deduction of payroll taxes if deemed employment status applies and such contracts no longer fall within IR35. This effectively passes the burden over to the recipient of services to determine employment status and to be responsible for tax / national insurance if appropriate.
With effect from 6 April 2020, medium and large companies in the private sector that contract with personal service companies for the provision of workers’ services will have to account for tax and national insurance through PAYE in the same way as the public sector has been required to do since April 2017.
It will no longer be the responsibility of the individual or the personal service company to determine their IR35 status. This will become the responsibility of the recipient of services, provided it is a large or medium sized business.
Small companies will be excluded from this change (leaving responsibility with the personal service company) – the Companies Act defines a small company as having two or more of the following features:
- Turnover of £10.2 million or less
- A balance sheet total of £5.1 million or less
- 50 employees or fewer
This means large or medium size recipients of services will need to take “reasonable care” when determining the IR35 position of any contractors engaged via a personal service company.
Bear in mind also that greater scrutiny of an individual’s tax status may lead to other issues arising. The test for employment for IR35 purposes is very similar to the test applied under general employment law – an unwary company may find itself required to provide various employee rights as well as being on the hook for unpaid tax / NI.
Contact our specialist employment team here for all of your employment needs.
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