In March, the Government announced that due to the disruption cause by the ongoing pandemic, it was shelving long awaited and feared changes relating to the treatment of what it describes as “Off-payroll Working”, more commonly known as IR35. The changes were to take effect from April 2020 and have now been deferred until April 2021.
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What is IR35 all about?
The so called IR35 legislation was introduced in 1999 to deal with discrepancies in tax treatment between employees and individuals who provide their services via a personal services company, wholly owned by the individual consultant or contractor (referred to as the contractor for the purposes of this article).
An employee will receive his or her salary subject to deductions in respect of employee’s tax and social security contributions and the employer will be liable to pay Employers National Insurance on that salary at a rate of 13.8% on earnings above a low threshold.
As a result of the Employers National Insurance obligation, it can be more cost effective for companies to source some services via contractors, rather than to employ staff directly. The individual providing their services through such a route enjoys a limited tax advantage, arising from the fact that the it is usual to structure earnings as a payment of salary at basic rate tax levels, with payment of the balance of earnings as dividend income to which corporation tax arises, thus avoiding or minimising higher rate tax thresholds.
The 1999 changes, which remain in force and are being increasingly enforced by HMRC, introduced a concept of “deemed employment income”, whereby payments made to an individual by his own company would be deemed to be employment income, leaving the limited company liable to pay employers National Insurance Contributions on the sums paid, regardless of whether they were paid a salary or dividend.
Who falls within IR35?
The basic test HMRC applies is whether it can be said that, were it not for the involvement of the Contractor company, the individual supplying services would be an employee of the client to whom the services are provided. Despite HMRC assurances to the contrary, this is not a simple or straightforward test.
In 2018, Public sector organisations became liable to make deductions representing PAYE amounts, including Employer’s National Insurance, from payments to Contractors even where PSC’s were used. This structure was what was supposed to be rolled out to the private sector from April 2020. There were always some exemptions, aimed at smaller companies. For these purposes, a smaller company is one with any two of:
- a turnover of £10.2 million or less
- a balance sheet of £5.1 million or less
- fewer than 50 employees
These businesses were always excluded from the proposed changes, and so will see no change as a result of the deferral.
Whilst clients which regularly contract with PSC’s will largely have breathed a sigh of relief at the deferral, it is important to note that for the contractors, the position is rather different. The existing IR35 rules have not changed and it is reasonable to expect that HMRC will turn its gaze on compliance with those rules by the limited company contractor population. In preparing for the introduction of the broader changes, HMRC stated clearly that if limited company contractors opted to treat themselves as within IR35 from April 2020, HMRC would not necessarily look back at prior years. That may suggest that contractors who do not willing embrace the IR35 regime now may find themselves under closer scrutiny from HMRC, who will surely be under pressure to raise elsewhere the revenues they had anticipated from the changes.
Yvonne Gallagher is a partner at Harbottle & Lewis
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