Are you IR35 ready?

IR35 was brought about in 2000 to ensure contractors and employees were being treated fairly with regards to taxation, working conditions and enjoying similar benefits.

IR35 aims to identify workers who would be classed as employees, if they didn’t have a Limited company. The Government and HMRC believes that contractors are getting away with not paying the correct Tax and National Insurance contributions because they are bypassing IR35 through setting up their own Limited company.

The changes to IR35 are not the rules themselves, rather the responsibilities surrounding IR35 decision making in the Public Sector. In short, the two main changes are as follows:

1.      Responsibility for making the IR35 decision

HMRC is passing the responsibility for making the IR35 decision to the public sector body who the contractor is working for. Previously, this decision has been that of the director of the personal limited company (contractor) but as of 6 April 2017, this will change.

2.      Responsibility for necessary deductions

HMRC is also making the body paying the Personal Limited Company responsible for calculating the obligatory PAYE, employees and employers national insurance and apprenticeship levy. This could include the agency, public sector body or employment intermediary.

The changes will dictate how much tax the contractor pays, and for those caught by IR35, most of the income paid to the limited company is subject to PAYE and National Insurance deductions.

The change means that somebody working within IR35 will become an employee of the body that pays their personal services company for tax purposes. They will continue to operate through their own Limited Company, and will not benefit from any employment or statutory rights.

Will the changes affect the Private Sector?

Reforming the public sector alone will not necessarily resolve the government’s perceived issues with incorrect IR35 determinations, however HMRC believes that it is a useful first step in resolving the problem. There are currently no immediate plans to make changes to the private sector, however, it is possible that if tax and national insurance revenue increased with minimal negative effect, the next logical step would be to enforce changes in the private sector for further revenue.

If you’re unaware of the changes to IR35, we have condensed what was said in the 2016 Autumn Statement here. You can also find all the information on the Spring 2017 Budget here.

Not sure if the new rules apply to you?

Take this test to determine whether you fall under IR35.