What is IR35?

IR35, short for “Intermediaries Legislation,” was introduced by HM Revenue and Customs (HMRC) in 2000 to tackle tax avoidance by individuals working through intermediaries, such as limited companies, but who would be employees if the intermediary was not used. Its primary aim is to ensure that individuals who work like employees, but through their own limited company, pay broadly the same tax and National Insurance contributions as employees.

A Brief History

The beginning of the 2017 tax year heralded the first big change within IR35 regulations. For those working in the Public Sector the responsibility for determining the employment status of contractors from the individual contractor to the end client or hiring organization.

This was expanded upon in April 2021 with the same changes introduced across the private sector.

What is Off-payroll working legislation and what does it affect?

The “Off-payroll working” legislation means that the responsibility for determining a contractor’s IR35 status has now moved to the end client if they are a medium or large sized business; with the company paying the PSC (usually the agency) being responsible for deducting the necessary tax and NI if IR35 applies.

How is it determined whether IR35 applies to a role?

To determine whether IR35 applies to a particular engagement, the end client must assess the working arrangement with the contractor. Several factors come into play when making this determination, including:

1. Control: The degree of control the client has over how, when, and where the contractor completes their work.
2. Substitution: Whether the contractor has the right to send a substitute to complete the work in their place.
3. Mutuality of Obligation: Whether there is an obligation for the client to offer work and for the contractor to accept it.
4. Financial Risk: Whether the contractor bears financial risk, such as the risk of loss or liability for unsatisfactory work.
5. Other Factors: Various other factors, such as provision of equipment, integration into the client’s business, and intention of the parties.

What happens after IR35 Status is determined?

If the role is deemed outside of the scope of IR35, payment can be made gross to the contractor limited company.

When the role is determined in scope, it is imperative that the fee-payer is deducting the correct levels of National Insurance and PAYE due against the income.

This is where Focused can help; we employ the worker and ensure the correct level of tax is applied, removing any concerns for you and your payroll. We’ll also provide the relevant insurance and employment benefits.

What about exceptions?

In the private sector, if a client is classified as small according to the Companies Act 2006, it is exempt from the rules. In such cases, the contractor must determine their own IR35 status, and the fee-payer is relieved of responsibility for PAYE and NICs.

A client must meet two of the following criteria to be considered small:

• Annual turnover: Less than or equal to £10.2 million
• Balance sheet total: Less than or equal to £5.1 million
• Number of employees: Fewer than 50