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IR35 in the Private Sector
When the IR35 rules were first introduced in 2000, the Government took the decision that they would target the intermediary company rather than the entity paying for the services.
Recognising a lack of success in applying these rules, the Government changed tact in 2017 and decided that where services were being provided to the public sector, the burden of applying the rules would shift to the “employer”.
From 6 April 2020, these “off-payroll working” rules will be extended to the private sector, including charities, where certain conditions are met.
The new rules will apply to companies which are not “small”, as defined by the Companies Act 2006.
To be a small company and therefore exempt from the rules, the payer company must meet two of the following conditions:
If these conditions are not met in two consecutive years, the company will cease to be small.
Under the new rules, private sector businesses the payer (or ‘end user’) must decide the employment status for tax purposes of workers they engage via an intermediary, that is, a personal service company, managed service company, partnership or similar entity.
Prior to this, it was the intermediary’s responsibility to decide their status for private sector engagements.
The end user will need to provide the employment status determination, together with the reasons for it to the worker.
The worker will then be able to dispute the determination if they disagree with it.
If the tests indicate a relationship akin to employment, the end user will need to deduct income tax and National Insurance contributions via payroll from fees for services paid to the Intermediary.
These changes are likely to have a dramatic impact for both end users and intermediaries, as the end users find themselves becoming liable for employer’s National Insurance and the intermediaries finding income being taxed under PAYE with little scope for claiming tax relief on expenses.
What can you do?
With around six months to implementation, it is important to act now to ensure that you are fully prepared for the new rules.
If you are an end user then it is important that you establish the profile of your use of intermediaries, and potentially any self-employed individuals you engage. We recommend that you:
If you are an intermediary, then you will need to consider how your end users will likely apply these rules. The liability for getting it wrong will fall on them and so you will need to gather such evidence as you can to make a strong case that you will continue to fall outside of the IR35 rules.
How can we help?
Our wide experience of the intermediaries’ legislation, employment status and associated HMRC enquiries means we can help you efficiently manage this process.
We can work with you to implement changes that will minimise the impact of the new rules and help you establish a robust compliance structure for the future.
Posted on 16th Nov 2023
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