What is IR35?

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 (sometimes referred to as a Personal Service Company – PSC) 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.

What changed in 2017

What changed in 2017

In April 2017 reforms to IR35 were introduced in the Public Sector. The rules themselves did not change - just the responsibilities surrounding IR35 decision making.
There were two key changes:

1

Responsibility for making the IR35 decision

To tackle the perceived abuse of the current rules, HMRC passed the responsibility for making the IR35 decision to the Public Sector body who the contractor is working for. Until April 2017, the responsibility to make a correct IR35 decision sat with the Director of the Personal Limited Company, in simple terms, the contractor. However, from April 2017 HMRC passed the responsibility for making the IR35 decision to the Public Sector body rather than the contractor. These changes now apply to the way IR35 is handled for any workers working in the Public Sector or with a Public Sector Body (as defined under the Freedom of Information Act 2000).

2

Responsibility for necessary deductions

In addition HMRC passed the responsibility of who needs to calculate and pay the necessary PAYE, Employees and Employers National Insurance, and Apprenticeship Levy to the body paying the Personal Limited Company. This could be an Employment Intermediary, Agency or the Public Sector body – whoever is the “fee payer”.

Who was impacted?

Who was impacted?

The changes to IR35 impacted both the “fee payer” (Employment Intermediary, Agency or Public Sector body) and all contractors, freelancers and locums operating as a limited company (PSC) and working for a public sector body. These include:

  • NHS
  • Social Care
  • Local Authority
  • Police and armed forces
  • Public sector education
  • BBC & Channel 4
  • Network Rail
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Does IR35 matter?

Absolutely, yes! The IR35 status of an Assignment dictates how much tax the contractor pays, and therefore how much they take home. For those Assignments that are considered caught by IR35 i.e. the worker is a disguised employee, then most of the income paid to a limited company is subject to PAYE and National Insurance deductions.

Will this impact the private sector?

HMRC and the Government have made it clear that reforming the Public Sector alone will not necessarily resolve the perceived issue of widespread incorrect IR35 determinations. However, they would like the Public Sector to be a leading light in this area. In the Autumn 2017 Budget the government said they would consult on extending these rules to the private sector, with the findings of the consultation expected some time in 2018, with a view to a roll out to the private sector expected in 2018 or 2019.

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