IR35: what is going on with the off-payroll rules? With delays, reversals (and reversals to those reversals), you’d be forgiven for losing track of what’s what — and now HMRC is adding to the policy.
Sounds like you need a summary of IR35 and a look at what’s happening in the future.
What is IR35?
IR35 is a tax law that seeks to determine whether a contractor working through an intermediary (like a personal service company) is a genuine contractor or whether they are an employee in all but name.
To explain, a contractor with a personal service company will usually pay corporation tax on their profits and pay themselves in dividends, which are taxed at 8.75%, 33.75% and 39.25% — more generous than the 20%, 40% and 45% employees pay in income tax.
With that in mind, is it fair for a contractor who is employed in all but name with a firm, to pay less in tax than their fellow ‘employees’? Supporters of IR35 — including the current government — say ‘no’.
So, IR35 is here to stay. According to the legislation, medium and large companies must evaluate their contractors’ employment status — contractors serving smaller firms have to work their own IR35 status.
HMRC has a handy tool that hirers, agencies and workers can use to check employment status. Note that IR35 is judged on a contract-by-contract basis, and that being ‘inside IR35’ means a contractor is deemed to be an employee for tax purposes.
IR35 timeline
The off-payroll working rules were actually introduced in 2000, requiring all contractors to work out their IR35 status and pay the correct tax, regardless of the firm they were working for.
From the start, it was controversial, with opponents seeking permission for and failing to obtain a judicial review in 2001.
After years of campaigns to help people understand the rules, the coalition government announced in 2016 changes that would take the IR35 pressures away from contractors working with medium and large firms.
The Government introduced the reforms in 2017 for the public sector and 2021 (after a one year postponement due to Covid-19).
In a surprise move as part of the September 2022 mini-budget, then-Chancellor Kwasi Kwarteng announced a repeal to both the 2017 and 2021 IR35 reforms from 6 April 2023.
This repeal was then cancelled, however, by Jeremy Hunt after he succeeded Kwarteng as Chancellor.
Upcoming adjustments
Most recently, HMRC launched a consultation into IR35 to prevent double taxation under the rules.
Specifically, the Government is considering whether IR35 should change so HMRC can refund some tax if the contractor or client incorrectly thought the work was inside of IR35 and income tax and National Insurance contributions (NICs) were therefore already due.
HMRC already has a process in place where it notifies workers and intermediaries that may be due a refund for taxes already paid on a contract — but that resulted in the deemed employer bearing the full cost of the tax and National Insurance liability.
In HMRC’s own words:
“This consultation sets out HMRC’s considerations for, and invites views on, a potential alternative solution. This would introduce new legislation to share the income tax and NICs liability between the client and the worker, by estimating a set-off for tax and NICs already paid by the worker and their intermediary.”
Need help navigating IR35, either as a contractor or employer? Don’t hesitate to get in touch with us.