IR35 came into force in April 2000 and applies when individuals provide their services through an intermediary to a client. If these services had not been supplied by the intermediary (usually the client’s limited company) they would have been considered employment services and therefore the rules come into effect.
In most cases the intermediary will be a personal service company set up purely for the individual undertaking the work (usually a company with a sole director and no other employees). If IR35 applies then there is no real tax advantage of that worker being off the payroll of the end client as they will not be able to, as is usually the case, flex their salary and dividend levels of income taken from their company.
Since IR35 came in there has not been a lot of compliance activity by HMRC with the first victory for the Revenue in nine years coming in the recent case brought against a BBC presenter; the case took five years to adjudicate demonstrating perhaps how complicated the legislation is even for HMRC who in 2018 have only won one of four revealed IR35 cases that have gone to court.
In April 2017 new rules came in with regard to those working in the public sector; these required the end client to assess when engaging a contractor via an intermediary to see if they would fall under IR35. The end client would then deduct income tax and national insurance on any payments made via their payroll and these could be offset against the year-end liabilities of the intermediary company.
HMRC have recently consulted about extending these rules to the private sector as well; this revision may occur in April 2020.
HMRC have a tool known as “check employment status for tax’ (the “CEST” tool can be found here). However, this tool is not a full proof one and it seems that it might favour HMRC in determining those who fall under IR35.
Furthermore, it does not appear that CEST takes into account the Mutuality of Obligation (MOO) where an employer’s obligation to provide work and pay for it, as well as the employee’s obligation to do the work. If there isn’t MOO, more often than not a contract falls outside IR35. HMRC claim that if a contract exists then a MOO has been established however this is widely refuted.
If HMRC can get end clients to accurately determine which contracts should be under IR35, both in the public and private sector, many people will find that they will be taxed under IR35 at source. It may need to be considered therefore whether continuing working via a limited company is the best option; however much will depend on whether the end clients are willing to take on the worker as an employee.
Despite the complexity of the legislation and the ongoing disputes about HMRC’s CEST tool there has been a significant increase in HMRC activity looking at IR35 cases over the last year so careful consideration should be taken in this area (the HMRC guidance on IR35 enquiries can be found here).
If you think you might fall foul of the IR35 rules, or if you have been told by a public body that you should be dealt with under IR35 and you disagree, please do get in touch with us. We can review and where necessary re-draft your consultancy agreements to minimise the impact of IR35.