IR35 - An Off Payroll Working Reminder
Our tax experts consider what public sector organisations really need to know about IR35.
As part of a number of measures to assist businesses as a result of the coronavirus pandemic, the government announced on 17 March 2020 that changes to IR35 will instead come into effect in April 2021.
If any further changes are announced, we will update you in due course with new guidance.
What Is IR35?
IR35 is a term used to describe rules that are designed to prevent individuals from avoiding employment taxes, by providing their services through third parties (an Intermediary) in circumstances where they would otherwise be working as employees.
Since 2017, organisations in the public sector have had an obligation to ascertain whether contracts they enter into with Intermediaries fall within the IR35 rules.
This is a reminder of the rules, the circumstances in which they might apply, and your responsibilities.
When Does It Apply?
An Intermediary will usually be the worker's own limited company called a personal service company (PSC), but it could also be a partnership, managed service company or another individual.
When determining whether the IR35 rules apply, the public authority must analyse the employment status of the worker who is providing the services. This is not always an easy task as there is no simple 'tick box' style process to go through; there are a number of factors that need to be considered in each situation.
As a starting point we recommend that you ask the question: in the absence of the Intermediary, would the worker be an employee if they were providing their services directly to us (the public authority)? If the answer is 'yes', then the IR35 rules apply.
In addition HMRC recommend using their Check Employment Status for Tax (CEST) tool. CEST is also useful as a starting point, however it does have its limitations and HMRC have acknowledged that on average it produces an incorrect answer for around 15% of cases.
To this end if there is any uncertainty as to the employment status of a worker then please do get in touch as our specialist employment lawyers who will be pleased to provide you with the necessary advice.
Your Responsibilities if the IR35 Rules Apply
You must tell the Intermediary of your determination and that you consider the IR35 rules apply to them. Ideally you should do this before the contract is entered into, but certainly before the work starts.
The party that pays the Intermediary (this might be the public authority or an agency) must deduct tax and National Insurance contributions (NICs) and report this to HMRC (together with sending HMRC the payment). The purpose of this is to ensure that the worker will pay broadly the same tax and NICs as if they were an employee.
This is a very broad recap of the IR35 rules and how they apply to the public sector.