The off-payroll working rules – often referred to as ‘IR35’ – take their name from the then-named Inland Revenue (Now HMRC) budget press release number 35 issued on 9th March 1999, in which detailed plans to create legislation that aimed to stop individuals from avoiding tax by supplying their services to a client through a (Personal Service Company) PSC while performing the same function as a regular employee.
A (Personal Service Company) PSC is limited company which a worker (or known in our case) a contractor sets up to provide personal services through to a client. HMRC states that this is an example of an intermediary.
IR35 legislation came into force via the Finance Act in April 2000. Designed to identify if these particular kinds of contractors are in fact ‘disguised employees’ and whether they should be subject to the appropriate Income Tax and National insurance contributions.
Since its introduction, it has been the responsibility of the individual worker to ensure they are working compliantly and paying the correct taxes however reforms in April 2017, meant that PSC`s working in the public sector, were no longer able to determine their own status and this was the responsibility of the Public authority, agency or third party.
As for the private sector, in May 2018 the government announced changes to the IR35 legislation were due to come into effect on 6th April 2020. This was delayed until 6th April 2021 because of the spread of coronavirus (COVID-19), this will see the responsibility and liability for determining a contractor’s IR35 status switch from the contractor to the end hirer (unless they qualify as ‘small’ according to the legislation).
You may be affected by these rules if you are:
1. A worker who provides their services through their intermediary
2. A client who receives services from a worker through their intermediary
3. An agency providing workers’ services through their intermediary
1. If you are a worker and your client is in the public sector, it is their responsibility to decide your employment status. You should be told of their decision.
2. If you are a worker and your client is in the private sector, it is your intermediary’s responsibility to decide your own employment status for each contract. The private sector includes third sector organisations, such as some charities.
1. All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.
2. If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.
For IR35 rules to apply, it means that you are considered an employee of your end hirer and therefore pay broadly the same tax and national insurance contributions as employees.
For IR35 rules not to apply, it means that you are operating as a genuine business and are being paid by your limited company and doing so outside of the IR35 rules. You will have the responsibility of ensuring that you are paying the right amount of tax and national insurance contributions as usual.
There are a number of ‘tests’ of employment used to determine the IR35 status of a contract. The key factors used for determining are Control, Substitution and Mutuality of Obligation (MOO).
1. Who decides what work is done? Does the end client have the right to move you from the task you originally agreed to do?
2. Who controls how the work is done? Does the end client have the right to decide how the work is done?
3. Who decides when the work is done? Does your end client have the right to decide your working hours?
4. Who controls where the work is done? Does your end client have the right to decide where you do the work?
The test here is to establish if the end client controls your workload and the way in which it is carried out. If they do, it is an indication IR35 rules apply.
1. Does the end client have the right to reject a substitute?
The test here is whether your limited company (Personal Service Company) can provide a substitute to do the work on your behalf. For IR35 rules not to apply, the contract should specify that a substitute can complete work on your behalf. If you are required to provide services personally this is an indication of employment and would mean IR35 rules apply.
The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:
1. That the engager must be obliged to pay a wage or other remuneration, and
2. That the worker must be obliged to provide his or her own work or skill.
The Check employment Status for Tax (CEST) service does not explicitly look at Mutuality of Obligation (MOO) it is designed to determine whether an existing or future contract will be one of employment or self-employment. It is assumed that a that a person using CEST will have already established MOO, which is necessary for a contract to exist, otherwise there would be no need to be using CEST to determine the status of the existing or hypothetical contract.
HMRC will also consider the financial risks, the workers involvement and contract.
Back in March 2017 when the IR35 reforms happened in the public sector HMRC released the Check for Employment Status for Tax (CEST) service which aimed to help determine how the work being done should be dealt with for tax purposes. HMRC has now released an updated version of the Check Employment Status for Tax (CEST) service in preparation for April 2021 changes to IR35 rules.
From the CEST tool you can print a dated copy of
1. Information entered
2. Corresponding result
Check Employment Status for Tax (CEST) service
If it is determined that IR35 applies to your contract, you will be classed as employed for tax purposes meaning you will pay broadly the same tax and national insurance contributions as employees and this will be deducted by your client or agency in the supply chain. You will still need to submit a tax return, and the income and tax already paid will be shown in the employment pages of your Self-Assessment return.
Contractors who are found to be ‘inside’ IR35 may be given the option of using an Umbrella company. Using a compliant and independently audited Umbrella company like Apex you will become an employee and will be outside the scope of IR35, you will have continuity of employment and still have the flexibility to switch between assignments whilst having full employment rights such as holiday pay, statutory Sick Pay, Statutory Paternity Pay and Statutory Maternity Pay. You will be paid through the PAYE system and we will ensure the necessary amounts of tax and national insurances contributions (NIC) are deducted and paid to HMRC.
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