In the beginning….
In 1999 when the then named Inland Revenue released its 35th press release of the 1999 Budget, it is unlikely anyone would have predicted that the rather innocuous term “IR35” ( the 35th press release of the Inland Revenue) would be still be very much a part of legal and tax parlance over 25 years later.
The intention behind IR35
- IR35 is all about tax.
- The government introduced IR35 to try and stop situations where some individuals (workers) were working in a business as freelancers or consultants alongside employees, but because they had set up limited companies (intermediary companies), they enjoyed tax advantages designed to incentivise people to set up businesses.
- The concern was that “but for” the intermediary company, the worker and the employee were essentially the same, but the worker was paying less in terms of tax and National Insurance Contributions (because of the way owners of limited companies can structure their payments and national insurance contributions). The client was getting the benefit of an “employee”, but only had to pay the worker’s invoice for services and any VAT (if applicable).
Inside or outside IR35?
The purpose of IR35 was to establish rules to analyse how the worker was really working for the clients organisation (e.g. did it really have freedom to work for others/ dictate its own hours or was it in substance treated as an employee would be):
- If a worker was inside IR35 – the worker was treated as an employee of its own limited company (i.e. the intermediary company) for tax purposes. The worker and the intermediary company would be taxed as employee and employer respectively.
- If the worker was outside IR35 – the worker was a “true” consultant and the worker’s intermediary company was taxed as a limited company and the worker was taxed as the owner of a limited company and benefitted from the tax advantages.
Where are we now with IR35?
There are now three different regimes that flow from the original 1999 IR35 mandate and the regime that applies depends on the organisation (i.e. the client) that is employing the worker through the worker’s intermediary company.
- Small businesses: (less than 50 employees/ balance sheet less than 5.1 million, annual turnover not more than 10.2 million): this is the original IR35 rule. The intermediary company of the worker must decide whether the worker is inside IR35 (i.e. but for the intermediary company the worker is effectively an employee of the of the end client) or outside IR35 (i.e. the way in which the worker works for the end client, means it is a “true” consultant). Some commentators have labelled this the “small business exemption”, because if the end user client is a small business (as defined) it means that it does not bear the responsibility of ensuring workers who it engages on a freelance basis and who have intermediary companies are “true” consultants.
- Medium and large businesses: (i.e. not a small business)
- are now governed by the Off Payroll rules.
- the onus is on the end client to decide whether or not the worker would be an employee of the client, but for the existence of the intermediary company (i.e. inside IR35) or whether the worker is a “true consultant”(i.e. outside IR35). The end client also has to issue a “status determination” to the worker and the worker’s intermediary company and set out its reasoning behind the decision.
- failure to issue this could lead to the end client being found to be (and therefore taxed) as a deemed employer of the worker.
- Public sector organisations: as with medium and large business these are now also governed by the Off Payroll Rules, but it is a separate regime to Medium and Large businesses. That said, the above rules regarding status determination apply to public sector organisations also.
- Be certain of whether they fall within the legal definition of small, medium or large or public sector, so they can be clear on their corresponding obligations in relation to IR35/ off payroll rules.
- Have a policy in place to identify when there is a change in status from small to medium/ large business which will trigger a change in legal requirements and obligations.
- Have a policy in place to manage and contract with freelancers to help manage IR35 / off payroll risk. Even small businesses should have a contract in place with a freelancer/ contractor (another blog for another day).
If you have any questions about IR35, please contact Tracey on 01202 729444 or e-mail firstname.lastname@example.org.