IR35 – What is it and how is it changing?
The IR35 Intermediaries legislation was introduced in April 2000 to prevent individuals from providing employment services to clients through an intermediary (e.g. limited company or partnership) in order to reduce or avoid PAYE and National Insurance contributions (NICs).
The intermediary will come under the scope of IR35 where the worker would be treated as an employee of the client but for the existence of the intermediary*. IR35 is therefore designed to catch ‘one man’ companies who work almost exclusively for one major client.
When IR35 applies, the income of the intermediary is regarded as the worker’s earnings from employment, and the intermediary will be required to operate PAYE and the worker will be subject to income tax and NICs on the ‘deemed employment payment’.
The deemed employment payment is calculated by taking income received from the client, less a statutory 5% deduction, less other expenses that are normally deducted from employment, such as pension contributions. From 6 April 2016, deductions for the cost of meals and home-to-work travel can no longer be made.
Contract of Service v Contract for Services
In order to determine whether or not the worker comes under the provisions, the ‘Employed v Self-Employed’ criteria should be considered. Factors that indicate employment/non-employment include:
- Terms and conditions of the engagement;
- Level of control that the client has over what way the work is done, the way that it is done, and the time and place in which it is performed;
- Opportunity to profit from sound management;
- Risk of financial loss;
- Provision of equipment and uniform;
- Basis of payment;
- Right of substitution;
- Number of clients;
- Level of integration into the client’s business.
The recent case of RS Dhillon and GP Dhillon Partnership , highlights how the facts of the case often do not point consistently towards employment or self-employment, and a broad view of the overall picture should be taken.
Upcoming Changes – Who is Responsible?
Traditionally, workers have been responsible for determining whether they fall within the scope of the IR35 legislation. However, from 6 April 2017, this responsibility will shift from the worker to the end client where they are a public sector employer, agency, or third party.
Furthermore, responsibility for operating the rules and making the deductions will fall to the client, meaning that they will be taxed as though the worker was any other employee (albeit without employment rights).
As a result of this, the 5% tax-free allowance for general business expenses will be withdrawn for PSCs working in the public sector on the basis that the intermediary will no longer have to meet these administrative costs.
* Both the agency legislation and the managed service company legislation should be considered before applying the tests under IR35.