Rules which prevent public sector bodies from disguising employees as contractors for tax purposes are set to be extended to the private sector from April 2020. Paul Matthews explores changes to the Intermediaries Legislation (IR35) and the implications for businesses which engage individuals as contractors.
The need for the rules
Businesses engaging contractors have long needed to be mindful of HMRC possibly challenging the arrangement as a disguised employment relationship. However, the position becomes more complex where the individual who provides the services does so through an intermediary.
The intermediary – typically a limited liability company owned by the individual providing the service – will charge the business (client) for the services it provides. In these instances, the individual takes remuneration from the intermediary and, in most cases, primarily by way of dividends.
There’s a risk this type of arrangement can be used to avoid employee income tax and national insurance where, without the intermediary, the relationship between the business and individual would be one of employer and employee.
What is the Intermediaries Legislation?
Naturally, the government is keen to crack down on use of intermediaries for the purpose of tax avoidance, so following the 1999 budget the IR35 legislation was introduced to combat the issue.
The IR35 ‘off-payroll’ rules were intended to ensure that people who work through their own company pay employment taxes in a similar way to employees.
IR35 applies where, but for the intermediary being involved, the relationship between the client business and individual would have been one of employer and employee. In these circumstances the intermediary and individual are treated as employer and employee respectively for income tax and national insurance purposes.
This means that if successfully challenged by HMRC, the intermediary will be liable to pay all income tax and national insurance contributions which should have been accounted for in accordance with PAYE. So, a client business may be tempted to regard this as the problem of the individual and intermediary.
Changes introduced on April 6, 2017 mean all payments made to intermediaries by public sector clients are subject to deduction of income tax and national insurance where, but for the involvement of the intermediary, the relationship would have been regarded as employer and employee. IR35 no longer applies to such arrangements.
The implication of this is that, in situations previously caught by IR35, it is the public sector client which is now responsible for deducting the right tax rather than the intermediary.
Philip Hammond announced in the 2018 Autumn Statement that these changes will also apply to large and medium-sized organisations within the private sector from April 6, 2020.
Carefully review contractual relationships
In light of these forthcoming changes it is vital businesses carefully consider relationships with contractors, both existing and new, by putting in place appropriate written contracts with new contractors and reviewing the terms of contracts with existing contractors.
The practical reality of the relationship also needs careful analysis before proceeding though – a contract which points towards the relationship not being one of employment is not going to assist if the contractual provisions don’t reflect reality.
HMRC has a tool designed to assist in determining whether a relationship is one of employment here. However, with these relationships likely to come under even closer scrutiny, legal advice should be sought.
For further information on the IR35 rule extension, or any other corporate law matter, call Paul Matthews on 0161 761 4611 or email him at firstname.lastname@example.org