The intermediaries legislation was first proposed in the 1999 Budget’s press release numbered IR35. This is why the legislation is commonly referred to as IR35 to this day. IR35 rules became law via Finance Act 2000, Chapter 8 of ITEPA 2003.

The legislation was in reaction to the increased use of companies by individuals to provide their services and the subsequent loss of revenue to the Exchequer.

Workers providing their services as employees are subject to PAYE income tax and employees national insurance contributions (NIC), while employers were liable to employers NIC.

Workers providing their services via a personal service company can take out the monies earned as dividends instead of salary, thereby avoiding paying NIC and pay less income tax as dividends are taxed at lower rates than wages. The worker also has the choice of when to extract monies from the company. Corporation tax is payable, but at a rate lower than the income tax rates.

Businesses hiring workers under contracts for services, i.e. self-employed contracts rather than contracts of services, i.e. employment contracts risked a review by HMRC which determined that the worker was an employee. This exposed the businesses to potential employers and employees NIC on all historical payments made to that worker. A similar review of the status of the worker was not possible if the services were provided through the worker’s own company prior to the IR35 legislation.

The IR35 legislation was an attempt by the UK Government to clamp down on the use of ‘one-man-band’ companies which were increasingly being used to provide professional services to clients. The entertainment industry, sports personalities and consultants in IT and other fields, were using companies to provide their services and reduce their tax bills.

IR35 legislation for Small Businesses

The original IR35 legislation remains in place for small businesses which are companies and partnerships that do not qualify as medium or large businesses.

The business is responsible for reviewing if it comes within the IR35 legislation.

The test considers whether a worker would be treated as an employee if the services were not provided via an intermediary. The intermediary may be a company or partnership, but most commonly takes the form of a personal service company.

A business with a contract caught by the IR35 legislation has to subject the net turnover from that contract to PAYE income tax and NIC rates. The net turnover is the turnover less a 5 percent expenses allowance.

The company has to report the ‘deemed employment’ under PAYE Real Time Information (RTI) by 5 April. If it is not possible to meet the deadline, there is a late reporting concession that allows the IR35 company to make the calculation and report it by the following 31 January. Any provisional payment of PAYE income tax and NIC by 19 April can be adjusted by submitting an Earlier Year Update (EYU) by 31 January of the following year. Late filing penalties are not charged.

IR35 legislation for the Public Sector

In Budget 2016, the Government announced a clampdown on ‘off-payroll working’ within the public sector.

From 6 April 2017, a public sector client must consider whether the work carried out by a worker provided by an intermediary such as a personal service company, partnership, a managed service company or an individual is deemed to be employment. If considered to be ‘employees’, the client is responsible for deducting PAYE income tax and NIC from these workers.

The legislation requires the public authority to look at whether the worker is subject to their control, supervision or direction – ignoring the person or company engaged to provide that worker.

The public authority must inform the person or company, contracted to supply the worker, of the status determination and whether the off-payroll working legislation applies before the contract is entered into or the work begins (if later). If the person or company is not told of the determination, then the public authority is responsible for PAYE income tax and NIC.

The person or company may either dispute the determination or ask for reasons behind the determination, and the public authority must respond within 31 days. If the public authority does not respond and is not the fee payer, then the public authority is responsible for PAYE income tax and NIC.

If the public authority has issued the determination that off-payroll working applies, then the fee-payer is responsible for deducting PAYE income tax and NIC from payments to the person or company.

If the person or company is VAT registered, they still issue VAT inclusive invoices, include these invoices in the VAT returns and pay the relevant VAT each quarter.

IR35 legislation for the Private Sector

In Budget 2018, the Government announced the extension of the off-payroll working rules to the private sector from April 2020 for all clients who are not ‘small’ businesses. The COVID-19 outbreak resulted in a deferment of implementation, and unless further delays are announced IR35 ‘off-payroll working’ for the private sector will apply from 6 April 2021.

Private sector businesses will be responsible for reviewing whether the work carried out by a worker provided by an intermediary such as a personal service company, partnership, a managed service company or an individual is deemed to be employment.

Small businesses are exempt but remain under the original IR35 legislation.

A small business is a limited company defined as small under the Companies Act 2006 if it satisfies two or more of the following requirements:-

• Turnover of not more than £10.2 million
• Balance sheet not more than £5.1 million
• Number of employees not more than 50
• An unincorporated business is small if it has turnover of not more than £10.2 million.

If the parent of a group is medium or large, then the subsidiaries will fall within the scope of this legislation.

The worker is the individual who provides their own personal services via their own company or another intermediary to a business (client). If this client is a medium or large business in the private sector, it is responsible for deciding whether the off-payroll working legislation applies.

The client must review whether a deemed employment exists for any worker who personally provides their services via an intermediary and must operate PAYE income tax and NIC if a deemed employment exists.

If a deemed employment exists with the client engaging an agency that provided the worker, then the agency must operate PAYE income tax and NIC.

If the client is based overseas, the worker’s intermediary will be responsible for determining if the off-payroll legislation applies.

Off-payroll working legislation is something that everyone in the labour chain should know to understand their obligations.

The procedure will be:-

• Medium or large-sized private clients must consider the employment status of any worker provided by an intermediary;
• The client must provide a Status Determination Statement (SDS) to the worker and the intermediary contracted with. The SDS gives the conclusions and basis for the conclusions;
• The worker or intermediary may disagree with the SDS and the client has to consider the reasons for the disagreement and respond within 45 days of receipt of the disagreement notification;
• During this time, the original determination applies to the tax treatment of payments made to the worker;
• Failure to respond to a disagreement within 45 days results in the workers PAYE income tax and NIC becoming the client’s responsibility;
• It will be important to keep records of the SDSs, disagreement notifications and responses together with reasons behind them; and
• This same procedure for issuing SDSs will apply to the Public Sector from 6 April 2021.

Status

The IR35 legislation as it applies currently to the public sector and private sector and in the future looks through the intermediaries and asks one simple question – would the worker be considered an employee if the end user of the services paid the worker directly for those services? This is the crux of any status review carried out by HMRC.

In March 2017, HMRC published a new Check Employment Status for Tax (CEST) tool to check if the intermediaries legislation applies. In the cases in which no determination can be made, a level of knowledge that includes use of case law is required to review the working relationship to come to a decision on the status of the worker.

However, the HMRC CEST result must be honoured by HMRC provided all the information supplied to obtain the result is correct.

The main factors of the employment status indicator are substitution, control, risk, part and parcel of the organisation and contractual arrangements.

In conclusion

This is a brief overview of the issues that businesses have to consider and there are many factors to consider when carrying out status reviews of workers based on legislation and case law developed over many years. I would recommend that businesses engage professional advice to assist in any review of workers provided by intermediaries.

Denise Heaney is a Tax Consultant for CavanaghKelly

Denise has 32 years experience having trained as a Chartered Accountant in a multi discipline environment and subsequently specialising in tax. She works predominantly in a consulting role dealing with succession planning, wealth extraction planning, disclosures to HMRC, tax enquiries, inheritance tax planning, High Net Worth individuals, employment related issues and construction related issues for corporates, partnerships and sole traders in UK and Republic of Ireland.

Denise.Heaney@cavanaghkelly.com