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What is IR35?

The IR35 rules ensure that UK contractors pay the same tax and National Insurance Contributions (NICs) as an employee would, doing the same work.  The name was taken from a press release back in 1999 from what was then the Inland Revenue, announcing the original changes.

IR35 is aimed at contractors who:

(a) operate through an intermediary company, which is typically a personal service company (PSC) that they own, and

(b) would otherwise be classed as employees of a third party, in the absence of the intermediary (known as a ‘disguised employee’), or

(c) claim to be self-employed but undertake work that would otherwise be classed as employment

In a PSC, an individual will usually receive dividends from their company (which are taxed at lower rates than earnings, and are still free from NICs), whereas an employee of a third party would receive a salary, subject to PAYE tax and NICs.  Self-employed workers may claim additional costs and pay lower amounts of NICs than employees.

Put simply, IR35 aims to charge PAYE and NICs on payments made to contractors, where it can be demonstrated that they are applicable.

What is changing and why?
From April 2020, the responsibility for applying IR35 rules will move away from the contractors and will instead be implemented by the third party ‘end-user’ (the company that uses the contractor), as long as they are not a small company – see below for what this means.

Contractors have self-assessed their IR35 status for many years, but HM Revenue & Customs (HMRC) believe the rules are not being applied, and the cost of this within the private sector could be as much as £1.3bn by 2023/24.

What is a small company?
A small company is defined by legislation as a business with two or more of the following:

  •  turnover of £10.2m or less
  •  a balance sheet total of £5.1m or less
  •  50 employees or fewer

What does this mean?
Under the new rules, if the end-user thinks that IR35 applies, the fee payer (this could be the end-user, a recruitment agency, or other third party) will need to account for and pay over any PAYE and all NICs due to HMRC, including employers NICs (and if appropriate the Apprenticeship Levy).

Contractors will be able to appeal if PAYE isn’t appropriate.  However, to encourage reasonable care and compliance by all parties, responsibility for payment of any PAYE/NICs will shift within the supply chain, if ‘fault’ can be demonstrated.  To avoid this, and any increased costs as a result of IR35 changes, several large businesses including HSBC, GlaxoSmithKline and Barclays have announced that contractors will only be engaged under PAYE arrangements in the future.

What to do now?
The new rules only come in from April 2020, so there is still time to review your current arrangements.  Whether you’re a contractor, or an end user, if you think you might be affected, please get in touch with Ian Haynes, IHaynes@hwca.com or 0131 625 5151, to find out how we can help you.

Want to know more? Call us on 01259 752232 or email tillicoultry@hwca.com

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