IR35

What is IR35?

IR35 is the name given to the tax legislation in the Income (Earnings and Pensions) Act 2003. It applies when an individual, normally a contractor, provides their services through their personal services company to a client where they could be regarded as an employee of the client.

If the contractor is regarded as an employee the fee payer should make deductions for income tax and National Insurance Contributions on the fees to be paid to the intermediary and account to HMRC.

IR35 for the private sector came into force on 6 April 2021.

Who decides if IR35 applies?

At present it is up to the intermediary to determine the status of the individual behind the service company. From 6 April 2021 the ultimate fee payer, so in most cases the end client company, needs to determine the status of the individual providing the service through the intermediary.

In the first instance, consideration should be given to using the online HMRC CEST (Check Employment Status for Tax Tool) to check status. There are also legal principles outlined below to consider.

Legal principles to consider

• Mutuality of obligation between the parties. Control exercised over the individual contractor.
• Substitution - the right to place a substitute in place of the contractor.
• Integration into the workforce.
• Financial risk to the contractor of running their own business.
• The reality of the situation - does the reality of the situation accord with the agreements in place?
• Any agreements should provide for a client-lead dispute resolution, in the event of a dispute.

When does IR35 not apply?

IR35 does not apply where the services are supplied to small businesses, ie a company meeting two or more of the criteria below:

• an annual turnover no more than £10.2m
• a balance sheet total no more than £5.1m
• no more than 50 employees on average over a year

What you should do now

• Review your existing arrangements to assess IR35 liability.
• Re-draft your commercial contracts having regard to the legal principles above and the actual assignment.
• Consider use of an umbrella company which employs the contractor direct.
• Transfer to employee status and PAYE.
• Subscribe to our Employment Law Brief to keep up-to-date with all the latest HMRC and Employment Tribunal cases in relation to IR35.

If you need specialist IR35 legal advice, please contact Michael Delaney in our Employment Law team on 01923 919316.