The IR35 rules reflect successive governments’ attempts to address a perceived form of tax avoidance whereby individuals provide personal service to a client or end-user through an intermediary rather than as an employee. The individual worker is hired out by the intermediary, sometimes via an employment agency, for a fee. In return, the intermediary, typically a personal service company of which the individual worker is a shareholder (and often the sole shareholder), pays the individual worker via dividends which are not subject to National Insurance Contributions (payable on employment income) and liable only to corporation tax, which is charged at a lower rate than income tax (payable on employment income).
A personal service company exists to sell the services of its worker who has chosen to go into business on their own account and is an alternative to self-employment. The worker is usually the controlling director of the personal service company in addition to being a shareholder, sometimes along with other family members. An alternative intermediary arrangement is a managed service company where there maybe multiple worker/shareholders who may not be in business on their own account and none of whom control the company.
The income tax provisions in the existing IR35 legislation can be found in Part 2 Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), although recent changes in the tax treatment of off-payroll workers in the public sector have been introduced by the Finance Act 2017. As a result of these changes, the responsibility for deciding whether the IR35 legislation applies in the public sector has shifted from the intermediaries themselves to the end-user public authorities – please see https://www.gov.uk/government/publications/off-payroll-working-in-the-public-sector-changes-to-the-intermediaries-legislation/off-payroll-working-in-the-public-sector-changes-to-the-intermediaries-legislation.
With effect from 6 April 2017 all payments made to personal service companies by public authorities, or in relation to contracts between public authorities and agencies or third parties who engage personal service companies, will be subject to deduction of payroll taxes if deemed employment applies. This means that if a public authority determines that the services a worker personally provides, or is under an obligation personally to provide to it, are similar to those of an employee, it must calculate income tax and employee NI contributions and pay these to HMRC then deduct these amounts from the intermediary’s fee.
Where a public authority determines that deemed employment status applies, it must inform both the worker and (if applicable) the agency that pays the worker’s intermediary of the outcome of the review and, if requested, provide a written response as to the how the determination was reached. In the case of ongoing contracts, this must be done before the first payment under the contract following the review is due. For new contracts, the review will invariably need to be completed before services are performed as deemed employment status is likely to affect negotiation of the contract price.
Deemed employment status for tax purposes will not confer any employee rights on the individual worker – the IR35 legislation empowers HMRC to tackle tax avoidance whilst it is the role of the employment tribunal to determine employment rights and obligations. However, as the rules require parties to consider the various factors affecting employment status, it is important those businesses at all levels take profession advice on this increasingly complex issue. It is the intermediary, not the deemed employer, that would be responsible for the payment of benefits such as Statutory Sick Pay, Statutory Maternity Pay and for the operation of pensions auto-enrolment.
For expert advice on IR35 issues, employment status and contracts of service, or for an audit of your workforce and your employment documents, please contact Paul Clark on 0191 206 9626 or email pclark@jacksons-law.com or a member of the Employment Team at Jacksons Law Firm.
Please share the article
