IR35 – what's your status?
Over recent months we've seen an increase in enquiries about the government's changes to IR35 rules. Put simply, the rules are designed to stop 'disguised employment' – i.e. the practice of being paid as a contractor under favourable tax terms, rather than receiving taxable income as an employee on the staff payroll.
To help clear up confusion, we've put together a Q&A that tackles some of the most frequently-asked questions on the new rules.
What exactly is IR35?
The name derives from proposals that were contained in the 35th Inland Revenue press release of 1999 (HMRC was formerly known as Inland Revenue). The legislation came into effect in April 2000, with the aim of preventing workers from setting up companies or partnerships, known also as 'intermediaries' , that would allow them to work effectively as employees, while saving on tax and national insurance payments.
When were the new rules brought in and what do they mean?
In April 2017, changes to IR35 came into force. Although the basic principles remain the same, responsibility for determining whether a worker is a contractor or staff member now rests on the 'end client'. Currently this new rule only applies when the end client is a public sector body, such as the NHS or a local authority. But it's widely believed by industry leaders that HMRC may roll out the changes to the private sector.
Can you explain how the changes might affect a contractor?
For example, an IT expert working long-term for the NHS might previously have been deemed a contractor, and would be paid via a personal service company (PSC), thus benefiting from lower tax and national insurance rates. In addition, the NHS would not have been required to pay an employer National Insurance contribution, leaving the Treasury even further out of pocket.
Another example would be a BBC newsreader who is paid under contract through the newsreader's PSC. As the BBC is a public sector organisation, it must review all such contracts, and is now determining whether non-staff newsreaders and other broadcasters should be put on the payroll.
If you're a genuine freelancer or contractor who works for many different clients and you can satisfy HMRC's IR35 tests, there is nothing to be concerned about. However, if you're paid through your own company, yet work in the same way as an 'on payroll' employee, you could be investigated, and the consequences can be expensive: falling foul of IR35 rules can mean hefty backdated bills for tax and national insurance.
I'm a private sector employer and sometimes use freelancers. Should I be worried?
If the new rules are rolled out to the private sector, it will become your responsibility to determine whether your 'freelancer' should really be on the payroll. Penalties for non-compliance would be likely, so it's good practice to take a good look at the circumstances of the people you are hiring.
How can I find out more?
HMRC has a test for employment status on the GOV.UK website here
At AMR, we're on hand to advise and guide you on all payroll issues, whether you're a start-up business or a large established company. For more information about IR35 or any other bookkeeping or payroll-related matter, please do get in touch via our contact page
or by speaking to a member of our friendly team on 01892 559480.