IR35 came into force in April 2000 and was introduced to tackle the issue of “disguised employment.” This is where some contractors (and their hirers) would try to take advantage of the tax efficiency of working through a limited company. This resulted in the hirer not needing to pay employers’ National Insurance for the contractor. However, in practice the contractor is essentially an employee and the necessary taxes and employee benefits should be paid.
IR35 assesses whether the contractor is ‘for all intent and purposes’ an employee when they are hired for a contract. If they are, they are “inside IR35” and employer’s National Insurance needs to be paid for them plus other employee benefits applied. If they are “outside IR35” no contributions or benefits are required.
Public sector and private sector contracts have differing rules,
- Public sector contracts – the hirer has the responsibility of working out whether the contractor falls inside or outside of IR35. If they are “inside IR35” then the hirer, agency or other third party who pays the contractor needs to deduct tax and NICs and duly report this to HMRC.
- Private sector contracts – the contractor themselves are responsible for working out whether they fall inside or outside of IR35. If they are “inside IR35” then they need to pay the tax and NICs due.
However, from April 2020, the private sector contracts are set for changes as announced in the Autumn Budget of 2018, with a promised consultation in early 2019. The latter is still being awaited.
Given that no consultation has been provided yet then many are guessing that the IR35 changes in the private sector will be like that of the public sector.
Thereby meaning, the hirer will be responsible for deciding the IR35 status of the contractor. Recruitment agencies and end-clients are concerned about this for a couple of reasons. If the changes are to give them the responsibility then,
- Assess an “outside IR35” incorrectly and it will make them liable for any unpaid taxes and penalties
- An “inside IR35” brings extra costs through the taxes to be paid and the extra work this involves.
If you are a contractor working in such a scenario then it is recommended that you check with the agency and/or client how they will be assessing your IR35 status. Business and contractors need to begin preparing for the changes.
If you require any assistance on this matter, then please call us on 0113 286 4486.
Sources: Contractor UK & Simply Business
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