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 is changing?

What is changing?

The rules of IR35 themselves are not changing – it is the responsibilities surrounding IR35 decision making in the Public Sector which are changing.
There are two key changes:

1

Responsibility for making the IR35 decision

To tackle the perceived abuse of the current rules, HMRC are passing 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 sits with the Director of the Personal Limited Company, in simple terms, the contractor. However, from April 2017 HMRC are passing the responsibility for making the IR35 decision to the Public Sector body rather than the contractor. These changes 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 are also passing 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 is impacted?

Who is impacted?

The changes to IR35 will impact 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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When will these changes occur?

Simply put, April 2017. In April, the responsibility for determining IR35 status will transfer from the individual operating the PSC to the Public Sector body they are working for, even if the assignment is through an agency.

Do the changes really 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 affect 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. Currently there are no immediate plans to roll out any of these changes to the Private Sector. However, if Tax and NI revenue increased with minimal negative effects it is possible that a logical step would be to look at the much larger Private Sector for further revenue.

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