IR35, which is short for Intermediaries Legislation and often referred to as “off-payroll rules”, was introduced in April 2000 as a way to combat disguised workers. This rule determines how workers should be taxed who are working through an intermediary company, including a personal service company. Introduced to the public sector In 2017, the responsibility for determining IR35 status was transferred to the party paying the worker, which in many cases would be the recruitment agency.
In recent years, various changes have been made to IR35 in order to combat illegitimate working. Despite the best efforts of HMRC, it is claimed that many limited company owners are still working outside the rules illegitimately. In October 2018, it was announced by HMRC that in April 2020, the IR35 rule would be extended to the private sector. Following the consultation from HMRC, we look at the main implications of how IR35 will impact the private sector:
Responsibility will no longer lie with the director of a business and will become the responsibility of the third party who is paying the worker, but only when the third party is a medium or large company. This is often a recruitment agency and means it will be vital for agencies to fully understand IR35 in order to help end clients make accurate decisions on their IR35 status, protecting the agencies from large tax bills.
The method that is used to determine IR35 status will not change. Therefore if you are outside IR35 now, you will continue to be outside of IR35 after the reform in April 2020.
Small companies will be exempt from the private sector reform and will therefore continue to apply the current off-payroll rules.
It has been proposed that improvements are required when communicating the IR35 decision and how to ensure it is conveyed to the worker. In order to achieve this, HMRC may introduce a rule for intermediaries to communicate the decision regarding IR35 down the contractual chain.
In 2017, the CEST service was developed by HMRC to help clients decided whether the off-payroll working rule applies. Although the tool was developed by HMRC, it is not always correct as it was tested and achieved 85% accuracy. Due to the current concerns surrounding CEST’s ability to reflect the private sectors complex nature, HRMC is working with stakeholders to deal with their concerns.
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