IR35, the intermediaries legislation introduced to tackle tax avoidance through personal service companies (PSCs), is set to change this year. Since April 2000 when it was brought in, IR35 has been the cause of much ire for freelancers and contractors, as well as proving difficult for HMRC to police effectively.
The changes are hoped to remedy these issues to some degree. The main change is that of responsibility. Since IR35 was first introduced, the workers themselves have been the party determining whether they fall inside the legislation or not. From 6th April 2017, that responsibility moves from the worker to the end client.
There are still both details and grey areas within the draft legislation which need to be resolved before April, but the new process will basically follow the format below
- The end client makes the decision over whether engagement falls inside or outside IR35.
- If there is an additional party in the chain paying the PSC, such as an agency, the end client informs them of their decision.
- If the engagement falls outside IR35, the worker is allowed to continue operating as normal and decides how to extract funds from their PSC.
- If the engagement falls inside IR35, the party paying the PSC must deduct both PAYE and employee NIC as well as paying employers NIC before they make the net payment to the PSC.
- The worker receives credits against tax already deducted from their pay. They are then able to draw net funds from their PSC as they see fit.
The essential change is that someone working inside IR35 now becomes an employee of the party paying their PSC for tax purposes only, meaning they do not benefit from employment or statutory rights and continue to operate through their own limited company.
What isn’t changing is the status tests for IR35, meaning that cases will still be determined on substitution, control and mutual obligation. In theory, anyone who genuinely operates outside IR35 now will be able to continue to do so after the changes come into effect. The rules are also currently restricted to the public sector, although this may change at some point further down the line.