IR35

HMRC introduced IR35 (or the ‘Off-Payroll Working Rules’) in 2000 to fight back against what it calls ‘disguised employment’. The IR35 legislation is designed to determine whether a Contractor is genuine rather than a ‘Disguised Employee’, for tax purposes.

IR35 legislation ensures that a “Disguised Employee” will be deemed ‘Inside IR35’ and will pay the same Tax and National Insurance contributions as an equivalent Employee.

To be deemed ‘Outside IR35’ means satisfying complex HMRC criteria to prove operation as a genuine business, and therefore operating outside of the IR35 rules.

Off-Payroll reform brings IR35 legislation in the private sector in line with the public sector. The Contractor shall no longer be responsible for assessing status and neither will the Contractor be responsible for the Tax due to HMRC.

Instead, new legislation (as per Chapter 10 ITEPA 2003) transfers the responsibility of assessing status from the Contractor to the Medium or Large Size End Client (size defined as per the Companies Act 2006 s382).

As well as the responsibility transferring, the tax liability will now rest with the deemed employer (or fee-payer) that is closest to the Contractor’s limited company.

Inside IR35

• Any payments are be subject to PAYE and NIC and the fee-payer must pay the correct amount of tax and national insurance (NI) – the same as an employee would have been deducted
• If an outside IR35 decision is successfully challenged by HMRC, penalties will apply to cover unpaid tax and NI

Outside IR35

• The individual is operating correctly as a limited company and the contractor is responsible for all tax.

The end-client must produce a Status Determination Statement (SDS), which shows the decision of an assessment. When providing the completed document, “reasonable care” must  be taken.

The SDS is passed down the supply chain through the fee-payer to the contractor. This determines what and how payments are made.