Many firms use consultants or contractors in their businesses on a routine basis, bringing in expertise and helping projects move at a faster pace. These are commonly referred to as off-payroll employees or come under the IR35 definition used by HMRC.
There are advantages for both your company and the contractor in having this type of relationship. However, it is important to consider the nature of the relationship, in relation to employment legislation, the off-payroll rules and the rules around IR35 status.
IR35, also known as the "intermediaries legislation," came into effect in April 2000 to address tax avoidance by disguised employees. It aims to ensure that contractors who work through an intermediary, pay the appropriate taxes and national insurance contributions, similar to employees.
In April 2017, the rules changed significantly in the public sector, shifting the responsibility for determining IR35 status from the contractor to the end client. In April 2021, the private sector saw the enforcement of the IR35 reform through the application of the off-payroll working regime. Like the IR35 changes in the public sector, this reform shifted the responsibility of deciding IR35 status from contractors working in the private sector to their business clients instead.
The UK government proposed significant changes to IR35 during the mini-budget of September 2022. They initially announced the repeal of both the public sector IR35 reforms from April 2017 and the private sector IR35 reforms from April 2021.
However, the current chancellor, Jeremy Hunt, later reversed the government's pledge to repeal the IR35 reform on 17th October 2022 and the existing IR35 rules remain. It seems unlikely that this position will change and companies will therefore be required to navigate the IR35 and off-payroll regimes for the foreseeable future.
The IR35 rules were introduced to address the avoidance of payroll tax where a business pays a worker via the worker's personal service company (PSC) such as a limited company, rather than as an employee.
Historically, the responsibility for the IR35 rules and deciding the status of the contractor fell on the PSC and not the client business.
The IR35 rules now require the end client of the contractor’s services to decide if any of their contractors, who provided services through a PSC, fall under the off-payroll rules. If so, the client business has to advise all relevant parties and make payroll deductions before the payment is made to the PSC.
IR35 applies to medium and large-sized companies that:
IR35 affects medium or large entities when any two of the following apply:
Similarly, a charity or other unincorporated entity is impacted by IR35 rules, if its annual turnover (excluding donations and voluntary income) exceeds £10.2m.
If your company does not meet the criteria above, it may be classed as a small business and the off-payroll regime may not apply, leaving the responsibility for determining IR35 status with the contractor. Smaller businesses are advised to seek legal advice on whether the off-payroll changes apply to them.
If your organisation meets the criteria to implement the IR35 rules, engages contractors through a PSC and is the end client of the services, you must take the following action:
If your organisation is not the end client but is part of a chain of payments, you may likewise bear specific responsibilities around IR35 determination and passing this ‘down the chain’.
The SDS sets out a contractor’s deemed status for the purposes of IR35 / the off-payroll rules and the reasons for that determination.
It’s important to take reasonable care when preparing the SDS. If your company fails to do so, the contractor’s tax and National Insurance contributions become the responsibility of your organisation.
It’s also important to recognise that the determination of IR35 status and the determination of ‘employment status’ within UK employment law, are closely linked. This means that where contractors are deemed to be within the IR35 regime, they may well for the same reasons be deemed to be ‘workers’ or full ‘employees’ for the purposes of UK employment law.
This means that contractors may hold a host of previously unrecognised employment rights such as the right to holiday pay, sick pay and protection for dismissal, which the contractor is in a position to bring before the UK Employment Tribunal.
Deciding whether the off-payroll rules apply to an engagement may be difficult as it depends on a wide range of factors. Our experienced legal advisors will guide you through the complexities of IR35 compliance, helping you understand the working practices and status determination required to avoid costly penalties.
As a business owner, there are simple steps you can take to help to get started with IR35:
If you're a business owner, IR35 can still have significant implications. Our practical IR35 advice for businesses is designed to cater to your specific needs, whether you're hiring contractors or providing services to other clients. Our lawyers help you navigate the IR35 compliance checklist and ensure your business remains on the right side of the law[d5] .
As a contractor, ensuring compliance with IR35 rules is crucial to avoid being classified as a disguised employee:
We offer comprehensive IR35 contract reviews to assess your existing contracts and advise on mitigating the risks around the IR35 legislation. Our expert IR35 contract lawyers will thoroughly analyse the terms and working practices to identify potential issues, providing you with peace of mind and clarity on your IR35 status.
Whether you're an employer looking to understand your responsibilities or a contractor seeking to safeguard your interests, LawBite is here to help. Don't let IR35 complexities overwhelm you. We can provide the expertise and guidance you need to thrive within the UK legal framework. To speak to an expert IR35 lawyer book a free 15 minute consultationor call us on 020 3808 8314.
Please note: we cannot advise on tax reporting requirements. You will need to speak to a tax advisor to ensure compliance.
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