The introduction of IR35 for the private sector took effect from
\nApril 2021 and represented the biggest change to employment tax for
\ndecades.<\/p>\n
Before then, businesses in the private sector were able to
\nengage contractors using personal services companies (or other
\nintermediaries) without having to give too much thought to the
\ncontractor’s employment status for tax purposes. This changed
\nfor “medium and large”-sized private-sector businesses in
\nApril 2021 when the responsibility for determining a
\ncontractor’s status and, if appropriate, operating PAYE and
\nNational Insurance contributions (“NICs”) switched from
\nthe personal services company to the end-user business.<\/p>\n
Inside<\/p>\n
\nWhich end users does this affect?
<\/p>\n
\nWhich contractors does this affect?
<\/p>\n
\nHow to carry out the status determination
<\/p>\n
\nThe dispute resolution process
<\/p>\n
\nConsequences if the status assessment is incorrect
<\/p>\n
\nProcesses and documentation
<\/p>\n
What is IR35?<\/p>\n
IR35 is a tax anti-avoidance rule designed to combat
\n“disguised employment” in situations where an individual
\ncontractor is providing their personal services (i.e., their
\nlabour) to an end-user via their own intermediary, such as a
\npersonal services company or partnership (referred to collectively
\nas “PSC” in this Inbrief).<\/p>\n
IR35 applies when the contractor would be an employee (or
\nofficeholder) for tax purposes if they were hired directly by the
\nend-user. If IR35 applies, PAYE and NICs must be operated in
\nrespect of the fees paid to the PSC.<\/p>\n
Since April 2021, for large and medium-sized private-sector
\nbusinesses, responsibility for assessing whether IR35 applies has
\nbeen with the end-user. If the end-user determines that IR35
\napplies, the responsibility for operating PAYE and NICs will move
\nfrom the PSC to the “fee payer” \u2013 that is,
\ngenerally, the entity which contracts directly with and pays the
\nPSC.<\/p>\n
Overview of the process<\/p>\n
The end-user is required to assess whether the contractor is
\nemployed or self-employed for tax purposes. It must take reasonable
\ncare in making that assessment and confirm its assessment together
\nwith reasons in a Status Determination Statement
\n(“SDS”).<\/p>\n
The end-user must provide the SDS to the next party in the
\ncontractual chain before making the first payment. This is next
\nparty will be the contractor themselves, unless there is another
\nparty in the chain such as an agency. If there is an agency in the
\nchain (see below), the SDS must be provided to the agency, who must
\nthen pass the SDS down the chain in turn. In practice, contractors
\naccepting a new assignment are likely to want to know in advance
\nwhether they will be assessed as within the scope of IR35.<\/p>\n
The end-user is required to have a dispute resolution procedure
\nto enable the contractor to challenge the assessment. In practice,
\na contractor is unlikely to challenge an SDS which assesses them as
\nfalling outside the scope of IR35. HMRC may review the assessment,
\nhowever, so it is important that the SDS sets out in sufficient
\ndetail the basis on which the decision is made, showing that
\nreasonable care has been taken.<\/p>\n
If the assessment concludes that the contractor is out of scope
\nof IR35, the PSC can continue to be paid gross. If, however, the
\ncontractor is assessed as within IR35, the fee payer (which is the
\nlast party in the contractual chain before the PSC) is responsible
\nfor operating PAYE and deducting employee NICs on the fees it pays
\nto the PSC (excluding VAT). The fee payer must also pay employer
\nNICs and, where applicable, the apprenticeship levy.<\/p>\n
If there is a UK agency in the chain<\/p>\n
If there is a UK agency in the chain which supplies the
\ncontractor via a PSC, the agency is the “fee payer”
\nbecause it is the party that contracts with and pays the PSC. As
\nthe fee payer, the agency will have the obligation to operate
\nPAYE\/NICs and pay employer NICs and, where applicable, the
\napprenticeship levy.<\/p>\n
However, the end-user retains responsibility for issuing an SDS
\nand providing a dispute resolution procedure. It must provide the
\nSDS to the agency as well as the contractor and the agency must
\nalso be allowed to appeal against the assessment.<\/p>\n
The obligation to operate PAYE\/NICs remains with the end user if
\nit does not meet its responsibilities, e.g., if it fails to provide
\nan SDS before the first payment is made. In addition, HMRC has
\npower to transfer PAYE\/NICs liability from the agency to the
\nend-user if there is no realistic prospect of recovery from the
\nagency within a reasonable period. HMRC has confirmed in its
\nguidance that it will generally not exercise this power if the
\nfailure to account for the PAYE\/\/NICs is due to a genuine
\ncommercial business failure.<\/p>\n
There are more complex rules for offshore agencies. If in doubt,
\nplease contact us for advice.<\/p>\n
What is the wider impact of IR35?<\/p>\n
IR35 is a tax rule. Crucially, it does not change the
\ncontractor’s status for employment law purposes.<\/p>\n
It is still legitimate for contractors to use PSCs – it is not
\ntax evasion to do so. End-users and fee payers should bear in mind
\ntheir obligation under the Criminal Finances Act 2017 to have
\nreasonable procedures in place to prevent tax evasion and the
\nfacilitation of tax evasion by their employees and contractors
\nwhile performing services for or on behalf of the end-user. If in
\ndoubt, please contact us for advice.<\/p>\n
Which end users are affected?<\/p>\n
Subject to anti-avoidance provisions, “small”
\nprivate-sector end-users are exempt from the new rules and are not
\nrequired to determine whether IR35 applies. Instead, the old rules
\ncontinue to apply – the contractor\/PSC remains responsible for
\ndetermining whether IR35 applies and the fee payer can still pay
\nthe PSC gross.<\/p>\n
A corporate end-user which is not part of a group will be
\ntreated as “small” in its first financial year and will
\nremain small until it ceases to be so. Small companies will become
\nmedium or large if they meet at least two of the following
\nconditions for two consecutive financial years:<\/p>\n
\nannual turnover of more than \u00a310.2 million
<\/p>\n
\nbalance sheet total of more than \u00a35.1 million
<\/p>\n
If two of these conditions are satisfied, the company must apply
\nthe IR35 rules from the start of the tax year following the
\naccounting filing date for the second financial year.<\/p>\n
These thresholds increase from April 2026, with the annual
\nturnover limit increasing to \u00a315 million, and the balance
\nsheet total limit increasing to \u00a37.5 million, though it is
\nworth nothing that because of the two year “look back”
\nperiod, these new thresholds will not have practical application
\nuntil April 2027 at the earliest.
\nWhere the small company is part of a larger group of companies, the
\ngroup turnover and revenue will need to be considered – please
\ncontact us for advice.<\/p>\n
Where the small company is part of a larger group of companies,
\nthe group turnover and revenue will need to be considered – please
\ncontact us for advice.<\/p>\n
Non-corporate end-users will be treated as “small” for
\na tax year if their annual turnover in the financial year ending at
\nleast nine months before the start of the relevant tax year was not
\nmore than \u00a310.2 million.<\/p>\n
In addition, IR35 does not apply to end-users who are based
\nwholly overseas. In this situation, the PSC will still be paid
\ngross and it will be for the contractor\/PSC to determine whether
\nIR35 applies and, if so, to operate PAYE\/NICs. An end user is based
\nwholly overseas if immediately prior to the start of the relevant
\ntax year it was not resident in the UK and did not have a permanent
\nestablishment in the UK.<\/p>\n
Which contractors are affected?<\/p>\n
IR35 affects individual contractors using a PSC to provide their
\nlabour. Contractors will not be affected by IR35 if they supply
\ntheir labour directly to the end-user without using a PSC (e.g., as
\na sole trader, though in such cases end-users are generally
\nrequired to make employment status assessments under general
\nprinciples).<\/p>\n
Contractors who are not tax resident in the UK and who are
\nsupplying their services exclusively outside the UK are unaffected.
\nIf they supply some services within the UK, the rules are more
\ncomplex and you should contact us for advice.<\/p>\n
IR35 is focused on the provision of labour rather than services.
\nFully outsourced services are therefore out of scope. For example,
\nif a company fully outsources its IT helpdesk or catering services
\nto a third party, it does not need to determine whether IR35
\napplies to any contractors working for that third-party service
\nprovider. Businesses who provide managed services rather than staff
\nshould be seeking to educate their customers about the fact that
\nIR35 does not apply to them at all.<\/p>\n
How to carry out the status determination<\/p>\n
The law requires end-users to exercise “reasonable
\ncare” in making the status determination. The obligation is to
\nassess what the contractor’s status for tax purposes would have
\nbeen if they had been engaged directly by the end-user without a
\nPSC.<\/p>\n
This involves taking account of several factors, including:<\/p>\n
\nControl and working arrangements \u2013 how much control does
\nthe end-user have over the contractor’s hours and place of
\nwork? Can the end-user direct how the work is done or is it highly
\nskilled\/specialised? Can the end-user move the contractor to
\ndifferent projects?
<\/p>\n
\nSubstitution \u2013 can the contractor send a substitute? Have
\nthey ever done this? Can the end-user reject the substitute?
<\/p>\n
\nMutuality of obligation \u2013 is there a binding commitment
\non the contractor or end-user to provide\/offer work?
<\/p>\n
\nIntegration into the business \u2013 how involved is the
\ncontractor in the business and its management? How would they
\nintroduce themselves to customers \u2013 as working for the
\nend-user or for themselves?
<\/p>\n
\nCarrying on business on their own account \u2013 does the
\ncontractor take any significant financial risk? Do they need to
\nmake significant investments in equipment or tools?
<\/p>\n
\nOther factors \u2013 for example, does the end-user impose
\nrestrictions on what other work the contractor can do? Does the
\ncontract take up the majority of the contractor’s time? Have
\nthey previously worked for the company? What is the intention of
\nthe parties?
<\/p>\n
The SDS will only be valid if it includes the reasons for the
\ndetermination.<\/p>\n
The status determination assessment needs to be repeated if the
\ncontractor’s assignment continues for any significant period of
\ntime (we think at least every 12 months, although there is no
\nguidance on this) or if the circumstances change.<\/p>\n
HMRC’s CEST tool<\/p>\n