The off-payroll working rules, commonly known as IR35, are designed to ensure that individuals who provide services through an intermediary, such as a personal services company (PSC), pay broadly the same Income Tax and National Insurance contributions (NICs) as employees. These rules target the use of PSCs to avoid employment taxes by engaging individuals off-payroll. The primary objective is to prevent tax avoidance by individuals who would otherwise be considered employees if they were directly engaged by the business.
How IR35 works
From 6 April 2021, businesses engaging individuals through a PSC must determine if the engagement falls 'inside IR35'. This means assessing whether the individual would be considered an employee for tax purposes if they were directly engaged. The business, referred to as the 'client', must issue a Status Determination Statement (SDS) to the worker and any other intermediary involved, explaining the determination and the reasons behind it. If the engagement is 'inside IR35', the worker must be paid through the PAYE system, and the client or fee payer must deduct and account for PAYE taxes and NICs.
Employment status for tax purposes
Determining employment status for tax purposes involves several factors, including mutuality of obligation, the level of control the business has over the worker, the ability to provide a substitute, the worker's integration into the business, and whether the worker is in business on their own account. HMRC provides a 'Check Employment Status for Tax' (CEST) tool to assist in making these determinations. However, it is recommended to use a combination of the CEST tool and the business's judgment, as the tool may not always provide a definitive answer.
Managing IR35 compliance
Businesses must implement comprehensive compliance programs to manage IR35 risks. This includes identifying PSC workers, completing status determinations, issuing SDSs, and ensuring contractual arrangements with PSCs and intermediaries include IR35 provisions. Regular reviews of compliance procedures and adequate training for individuals responsible for compliance are essential. In complex supply chains, it may be challenging to identify the client, and businesses must ensure they have processes in place to manage these complexities [1, 3].
Recent changes and additional considerations
Recent changes to the IR35 regime, effective from April 2024, provide more clarity for businesses. If a deemed employer incorrectly concludes that an individual is outside IR35, HMRC will now set off income tax and/or corporation tax already paid by the worker or their intermediary when assessing the tax liability of the deemed employer. This change aims to address potential over-collection of tax and resolve unfairness in the tax system.
Additional considerations
Small business exemption: The new rules do not apply to private sector businesses classified as 'small'. In such cases, the PSC remains responsible for determining IR35 status and paying any taxes due.
Dispute resolution: If a worker disagrees with the SDS, they can raise a dispute, and the client must respond within 45 days, either upholding the original determination or issuing a new one.
Complex supply chains: In complex supply chains, it is crucial to identify the correct client to avoid non-compliance and potential penalties.
By understanding and implementing these guidelines, businesses can effectively manage their IR35 obligations and mitigate associated risks.
This article was generated using Lex HR, an AI tool designed to assist HR professionals with employment law. If you find the content helpful, please explore Lex HR and sign up for a free trial to see how it can benefit your HR practices.
