IR35 in Under 500 Words
IR35 is the Intermediaries’ Legislation and applies to relevant contractors, which are workers who supply their services to a client through an intermediary, which could be;
- A personal service company
- A partnership,
- A managed service company, or
- An individual.
A personal service company is one where the director is the worker and personally generates the majority of that company’s income.
Labour Supply Agencies
An agency is not an intermediary for the purpose of the off-payroll working rules, but similar rules apply under the Agency Legislation, which requires workers to be taxed as employees, unless certain exemptions apply.
The involvement of an agency does not impact the application of the off-payroll working rules, although agencies may be regarded as the fee payer.
Medium to Large Businesses
In the private sector, a medium to large size business meets 2 or more of the following conditions;
- an annual turnover of more than £10.2 million
- a balance sheet total of more than £5.1 million
- more than 50 employees
Off-Payroll Working Rules
Like IR35 the new off-payroll working rules require that whenever a worker is engaged via an intermediary and is performing duties in the same manner as an employee of the client, then PAYE regulations must be observed and employment taxes must be paid, rather than business taxes.
The client hiring the services of relevant contractors will be responsible for deciding their employment status will;
- decide the employment status of a worker on a contract by contract basis, with the worker or an agency that supplies the worker’s labour or services to the client.
- provide a status determination for the contract and the reasons for the determination to the worker and the agency or any other organisation in the labour supply chain.
- keep detailed records of all employment status determinations, including the reasons for the determination and fees paid to the worker, via the agency or his/her intermediary.
- have processes in place to deal with any disputes that arise from determinations.
If the off-payroll rules apply, the fee payer, which may be the client or an agency or other organisation in the supply chain, before the contractor’s invoice is paid, will need to observe the PAYE regulations and deduct and pay tax and National Insurance contributions to HMRC accordingly.
It is essential to take reasonable care when making a status determination about the employment status of a worker, because if the off-payroll working rules apply, this could result in the worker’s tax and National Insurance contributions liability becoming the client’s responsibility.