The reforms to the off-payroll working rules (IR35) were delayed by 12 months thanks to the COVID-19 crisis, but they have now been in effect since the 6th of April, 2021.
If you are working as an IT contractor, therefore, you should already be aware of IR35.
IR35 is derived from an HMRC press release published in 1999, which announced changes to the tax rules around off-payroll working. Before this, off-payroll work consisted of the following:
- Individual workers who provided services to an end-user client via an intermediary
- An intermediary may be an employment agency, a limited company owned by the worker or another individual
- The end-user client pays the intermediary, who then pays the worker – or the worker receives dividends if the intermediary is a limited company.
- The transaction was not subject to Income Tax or National Insurance Contributions (NICs) as the end-user client paid the intermediary.
In 1999, HMRC decided that intermediary companies were being used to shield individual workers from Income Tax and National Insurance liabilities when they were effectively employees of the end-user client.
The changes that HMRC implemented are generally referred to as IR35, but there is some confusion as there are two separate regimes with different applications and effects. There is an IR35 regime that exists, which applies to small companies, and there is also the Off-Payroll Working Rules (OPWR) which sit above the IR35 regime.
The original IR35 legislation has been in place for many years – although it may not have always been applied. This IR35 legislation requires the intermediary to determine whether or not the worker would be classed as an employee of the end-user client if it wasn’t for the existence of the intermediary. If the worker is deemed an employee, then the intermediary must operate payroll for them, make deductions, and pay Employee NIC fees for the service.
The new element of the IR35 legislation is the Off-Payroll Working Rules (OPWR) introduced for the public sector in 2017. The effect is intended to be the same as the original IR35 rules, but the (significant) difference is that now it is the end-user client who determines the employment status and makes any deductions rather than the agency or company owned by the contractor.
This then extended to the private sector in April 2021.
The OPWR applies to any contractor engagements involving medium and large-size companies as the end client. Medium or large-sized companies usually meet two of the following three criteria:
- A balance sheet with a value of at least £5.1 million
- Turnover greater than £10.2 million
- 50 or more employees
Small companies are not obliged to apply the OPWR rules. However, they are still subject to the IR35 rules, meaning the lowest intermediary has to decide whether a contractor is an employee.
What factors does HMRC use to decide on a “disguised employee”?
HMRC has provided the following criteria that they consider when deciding if a contractor is an employee of the business which engages them or not:
- Personal service – if a contractor is expected to deliver their services in person and not substitute themselves with another qualified employee, then they are an employee and not a contractor
- Mutuality of Obligation (MOO) – a contractor is not obliged to undertake work other than the contracted services, whereas an employee is
- Right of control – the end client has the right to direct and control the contractor.
- Right of substitution – If a contractor can send someone else to do the work, then the contractor is independent of the end-client
- Provision of equipment – contractors should provide their equipment and not rely on the end client to provide it.
- Financial risk – how much financial risk the contractor takes on confirms whether they are detached from the end client or not
- Opportunity for profit – the other side of risk, if a contractor can profit from reduced costs and well-organised work, they are less likely to be classed as an employee.
- Length of engagement – an open-ended contract is usually associated with employment, but this is not a significant factor in determining whether a contractor is an employee.
- Employee benefits – if a contractor is entitled to employee benefits such as car parking, gym membership or paid leave, this implies an employment relationship.
- Right to terminate employment – employees’ rights to terminate employment are straightforward, whereas contractors tend to be more complicated.
- Exclusivity – a self-employed contractor is expected to have multiple clients and not just rely on one
Hopefully, this has given you some background to the IR35 reforms, and future articles will explore this further, but if you have any other questions, please feel free to email me, Jonathon Webley (Managing Director) at firstname.lastname@example.org or ring me directly at 0161 416 6634 or 07941 798 021.