Changes to IR35 Legislation

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The big change regarding the IR35 legislation is that from April 2017, responsibility in determining the IR35 status of a public service company (PSC) moves from the contractor to the end-client for all workers providing services in the Public Sector. This includes all recruitment agencies.

It is believed that there are over 250,000 PSCs operating in UK with many operating as a single person meeting the requests of their clients. This style of company is found in many industries, with the healthcare sector being one of the affected industries.

What is IR35?

IR35 was first introduced in 1999 and it is a tax law. The official title, which was derived from the press release confirming its introduction, is Intermediaries Legislation and it came into effect in April 2000. This was part of the Finance Act. In the present day, the income tax element of IR35 has been integrated into Income Tax (Earnings and Pensions) Act of 2003 (ITEPA 2003) while the NIC aspect is now included in the Social Security Contributions (Intermediaries) Regulations of 2000.

Why was IR35 introduced?

IR35 was brought in by the Government to challenge the issue of “disguised employment”. This refers to the situation where a company or organisation utilise self-employed professionals or contractors, usually through an intermediary or agency, as opposed to providing them with an employment contract, leading to the “disguised employment” situation.

This provides the employer with considerable benefits such as saving money in not having to pay NICs for the employee, not having to provide employment rights and not having to pay benefits. With respect to taxation, a service provided through a limited company can defer or mitigate income tax and NICs for the company, which has seen the Exchequer lose out on considerable sums of money. Estimates from the HMRC suggest that non-compliance with this legislation will cost £440m in 2016/17.

Why has the change been introduced?

The IR35 requires the PSC to make payments with respect to PAYE and NICs, but many taxpayers are not following these rules, and HMRC claims it doesn’t have resources to chase after these payments from the many PSCs across the country.

The change, in place from April 2017, sees the end-client taking responsibility for IR35 relating to the contractors that provide a service for them. The onus is now on the agency or organisation to determining if they are using someone that is legitimately self-employed or if the PSC they use is merely a method for the employee to obtain payments and not look to deduct NICs or PAYE.

Any organisation or agency which decides that the latter case is true will be required to withhold PAYE and NICs as well as being forced to pay the employers NICs on all relevant cases.

The immediate issues for all employees is that they may receive less take home pay if they are deemed to be operating as a PSC while the agency or organisation will have a greater workload and may be forced to pay out more money in order to satisfy HMRC with respect to payments. All agencies and bodies will have to work closely with all contractors to determine the true nature of their position.

Action to be taken

You should be aware of your IR35 status and whether you are classed as an independent contractor or not. If unsure of your status it would be advisable to liaise with your accountant who will be able to advise you further on this matter.

Anyone that believes they are outside of I35 has the right to question the decision with the Trust on a one-by-one basis. As of yet, HMRC have not gone public with the online tool they intend to use to assess IR35 status but when it is live, it is likely it will provide insight into what HMRC deems to be IR35 status. After raising an issue with a Trust, you should receive a response within 31 days. Steps that can be taken at this point include retaining the PSC and challenging the assessment in the relevant tax return or utilising an umbrella option.

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