The IR35 legislation was introduced in April 2000 by the Inland Revenue (IR) and is commonly referred to as the Intermediaries Legislation. The legislation only affects contractors operating through their own Limited Company/Personal Service Company (PSC).
PSC’s can be a lucrative way for contractors to be paid. Therefore, it is important that only those contractors who can ‘genuinely’ operate through this payment vehicle should benefit.
It was introduced to tackle the problem of ‘deemed employment’. i.e. if the Limited Company/PSC did not exist would the contractor be an employee. If this was the case, IR35 ensures that contractors must pay broadly the same amount of tax and national insurance contributions as employees. However, it was down to the individual PSC/Limited Company to apply the IR35 rules and as a result there is widespread non-compliance & HMRC predicts only 10% of those who should apply the rules, do so. As a result, in April 2017 HMRC reformed the IR35 legislation to the public sector, and will be applying those reforms to the private sector from April 2021.
Firstly, regarding the IR35 private sector reforms, these reforms only affect Limited Companies. Not umbrella companies, PAYE workers or self-employed individuals, so if you do not have a Limited Company you have nothing to worry about. If you do currently have a Limited Company or Personal Service Company (PSC) then it is important you understand what is changing.
In the period pre-April 2021, it is down to you, the contractor, to decide if the IR35 rules apply to your contract and as a result how much tax and national insurance contributions you need to deduct and pay each time your business bank account receives payment. If you decide that the rules don’t apply, or you are “outside” IR35 then you can reduce your tax and national insurance contributions quite considerably. As a result, HMRC estimates that 90% of contractors do not correctly apply the rules and have estimated this is costing the UK approximately £1.3 billion, so you can see why HMRC has decided to act. From April 2021 onwards HMRC has decided to make the end client (not the recruitment agency) responsible for deciding if IR35 rules apply or not. In other words, the actual place of work will confirm if you are inside or outside IR35. The recruitment agency, if you are using one, will have no say in deciding if the rules apply. Furthermore, the risk and responsibility to pay the correct tax and national insurance contributions across to HMRC will no longer be that of the contractors. It will be that of the “fee payer” or the entity paying into the business bank account of the limited company. That will normally be the recruitment agency, if you do not use a recruitment agency it will most likely be the end client. So let’s recap.
As a result of the subtle changes it is extremely unlikely the supply chain will conclude you are outside IR35. HMRC have stated though that the end client should use their CEST tool to determine if the rules apply or not and doesn’t advise on making sweeping assessments. Once the end-client determines if you are in or outside IR35 this must be relayed to you and your agency (if you’re using one) via a “Status Determination Statement” (SDS). Furthermore, the end-client must take “reasonable care”, in deciding your employment status. The agency/fee-payer is bound by the decision of the end client. If you are inside IR35 then your net pay will be broadly the same as an employee. If the end-client confirms you are outside IR35 then it is business as usual and you can be paid gross pay it into your Limited Company bank account and you will be responsible for deducting tax and national insurance contributions.
There is one exception to all of this, and that is if you work with a “small company” as defined in the Companies Act (2006). A “small company” must meet two of the following criteria to be deemed a small company for IR35 purposes.
So, assuming from April 2021 you are working for a medium or large company and you are inside IR35 what are your options?
Out of the four options available the services i4 offers will give you the most flexibility whilst giving you all of your employment rights and it still allows you to retain your Limited Company rate of pay i.e. your net pay should be more through us than anything else.
Just a word of warning, do not partner with loan schemes or enhanced umbrella schemes that guarantee a certain percentage net pay often around the 84% mark. These are usually tax avoidance models and the punishments for engaging with such models are exceptionally harsh.
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