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Last edited 10 Feb 2022
The reason for the introduction of IR35 was HMRC’s belief that the Exchequer was losing substantial amounts of tax and national insurance due to the use, by individuals, of service companies or self-employed status in circumstances where, in reality, they were employees who should be subject to full Pay As You Earn (PAYE) rules.
IR35 sets out the general rules which individuals must apply to their own circumstances. There are a variety of tests which should be applied in considering whether or not PAYE applies and it should be emphasised that these are matters which are of relevance to both sides of a contract to perform services. This is because there are potentially costly consequences for both parties in the event that IR 35 is not applied correctly.
For the party paying for the services there is the possibility that HMRC will deem amounts paid to be net of tax and national insurance and thereby 'gross up' these amounts and demand the difference from the paying party.
And for the party providing the services there could also be additional tax to pay as expenses incurred in providing those services would be severely limited, and of course, the likelihood would be that the employing party would seek to recover from the service provider any additional tax it had to pay to HMRC .
So it is important to ensure that these rules are understood and observed. Guidance is provided by HMRC and as part of this guidance a number of 'business entity' tests have been published any of which could be used as part of an assessment as to whether someone is employed or self-employed.
These tests are:
- Does the business have any premises?
- Does the business buy its own professional indemnity insurance?
- Does the business use other workers?
- Does the business spend more than £100 per month on advertising?
- Was the business owner previously working for the same customer under PAYE?
- Would the business have to bear the cost of rectifying its own mistakes?
- Does the business stand the risk of incurring bad debts?
- Is there negotiation over pay rates?
- Can the business substitute one person for another, and have they ever done so?
- Can the business make more profit by changing the way it works?
- Does the business have a business plan?
IR35 does not threaten those who have set up their own businesses and who are genuinely self-employed. It targets those which would otherwise be classed as 'employees' when carrying out a particular contract. It applies on a contract by contract basis, so it is not the case that if a self-employed person has only one client, IR35 automatically applies. What matters are the terms and the conditions which apply to each individual contract. It is perfectly possible for an individual to have several contracts running concurrently, one of which falls within IR35 and to which PAYE rules apply.
 2020 changes
From April 2020, medium and large 'engagers' will become responsible for assessing an individual’s employment status and deducting the right amount of tax and National Insurance contributions. Changes to Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) are intended to increase compliance with the existing off-payroll working rules in the private and third sectors to ensure fairness between individuals working in a similar way. Ref https://www.gov.uk/government/publications/rules-for-off-payroll-working-from-april-2020
In January 2020, the review was confirmed, with a call for evidence. Financial Secretary to the Treasury Jesse Norman said: “We recognise that concerns have been raised about the forthcoming reforms to the off-payroll working rules. The purpose of this consultation is to make sure that the implementation of these changes in April is as smooth as possible.”
Following the call for evidence, the Budget 2020 stated: 'The government believes it is right to address the fundamental unfairness of the non-compliance with the existing rules, and the reform will therefore be legislated in Finance Bill 2020 and implemented on 6 April 2020, as previously announced.'
However, on 17 March 2020, Chief secretary to the Treasury Steve Barclay told the House of Commons: “...that the government are postponing the reforms to the off-payroll working rules IR35 from April 2020 to 6th April 2021.”
On 27 April 2020, The House of Lords Economic Affairs Finance Bill Sub-Committee published a report urging the government to completely rethink the IR35 legislation. Ref https://publications.parliament.uk/pa/ld5801/ldselect/ldeconaf/50/50.pdf
- Appointing consultants.
- Business plan.
- Construction contract.
- Construction Industry Scheme or IR35?
- Court of appeal ruling on holiday pay and employment status.
- December 2020 GDP figures show construction vulnerable.
- Hourly rate.
- IR35: essential steps for compliance.
- Payroll companies.
- Personal service company.
- Professional indemnity insurance.
- Status determination statement SDS.
- TUPE Regulations.
- Umbrella companies.
 External references
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