IR35 is a piece of legislation that has been around since 2000. The IR35 rules apply where an individual disguises an employment relationship with their client by invoicing their services through a limited company or “Personal Service Company”.
Such an arrangement results in the individual paying a lower overall rate of tax than if they were subject to PAYE as an employee. Typically profits are taken from the Personal Service Company in the form of dividends which attract a lower overall rate of tax than a salary subject to income tax and national insurance. The IR35 rules seek to counter this tax advantage.
Until relatively recently the onus has been on the individual to assess whether they are caught by the rules, by looking at their engagement with their client and asking themselves the question – “If I wasn’t invoicing my services through my Personal Service Company, would HMRC treat me as an employee?” If the answer is yes, then additional tax has to be paid to HMRC to put the worker in the same position as an employee on a salary.
In 2017 the government changed the rules for workers in the Public Sector – those working for organisations like the NHS, BBC, Schools and Universities and other Public Bodies. The change placed the responsibility for deciding whether IR35 applies onto the Public Bodies engaging the workers. The result has been that many of the public bodies have decided to automatically treat workers as employees and operate PAYE on their pay, rather than risk getting things wrong and falling foul of HMRC.
At the 2018 budget the government announced that they would extend the Public Sector changes to the Private Sector from April 2020. The rules only apply to medium and large size businesses. Your business is classified as medium/large once 2 of the following 3 limits are exceeded:-
- Annual turnover £10.2m
- Balance sheet total assets £5.1m
- Average number of employees – 50.
So, if you are a medium or large size business, operate in the Private Sector and engage contractors using Personal Service Companies, the new rules may affect you and you will be tasked with assessing whether IR35 should be applied to the engagements with your contractors. You will also be responsible for collecting any income tax and NICs owed from the assignment.
Whether you are engaging contractors or are a contractor working through a Personal Service Company, we can help you to assess whether IR35 applies and ensure that you remain compliant with the rules.
How we can help
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