IR35 was introduced in 2000 by HMRC in response to an increase in the number of employees who were leaving their existing employer and returning as a Limited company contractor the following day, doing the same work in the same way, in the same place. IR35 is a set of rules to identify “disguised employees” - i.e. workers who would (in HMRC’s eyes) be classed as an employee, if you removed the fact they have a Limited company.
The Government and HMRC believes that the majority of contractors are not determining IR35 correctly and therefore are not paying the correct Tax and National Insurance contributions to HMRC.
If you are contracting in the Public Sector and your client determines you as “caught by IR35” this will likely mean a substantial reduction in your earning potential (unless you are already operating with deemed payments). In addition, you will still incur the running costs of your business such as, accounting fees, business insurances, marketing and other operating costs.
The rules of IR35 themselves are not changing – it is the responsibilities surrounding IR35 decision making in the Public sector which is changing in April 2017.Find out more about IR35 here
All contractors, freelancers and locums operating as a limited company (PSC) and working for a Public Sector body will be affected by IR35 changes. These include:
Not long, April 2017. In April, the responsibility for determining IR35 status will transfer from you as the individual operating the PSC to the Public Sector body you are working for, even if the assignment is through a recruitment agency.
It is important to weigh up the options to decide how to operate, by looking at the alternatives, what risk there is and what benefits you get. It is highly likely that agencies and Public sector bodies will deem most contractors as caught by IR35 and operate “deemed payments”. A deemed payment is a payment where tax and NI has already been deducted as if you were an employee.