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 were previously operating 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 have not changed – it is the responsibilities surrounding IR35 decision making in the Public sector which changed in April 2017.
The government have said they will consult about extending this to the private sector, with the outcome of the consultation expected at some point during 2018.Find out more about IR35 here
All contractors, freelancers and locums operating as a personal service company (PSC) and working for a Public Sector body were potentially affected by the IR35 changes which were introduced in April 2017. These include:
When considering how to operate and get paid, it is essential that you take IR35 into account as it determines what taxes you pay. If your contract is deemed “caught” by IR35 your income will be subject to the same tax and NI deductions you would pay as an employee.
It looks increasingly likely that the new way IR35 is applied will be the same for both the public and private sectors. This means that every assignment or contract taken by a personal service company will have an IR35 status determined at source which will control what taxes are applied, so it is important to seek advice about your options.