IR35 rules – What they are and why they matter

IR35 rules -November 2022

IR35 rules – What they are and why they matter

The status of IR35 or off-payroll working has recently caused more confusion once the repeals to reforms announcement by Kwasi Kwarteng were scrapped by new Chancellor Jeremy Hunt.

Tax legislation designed to stop a form of tax avoidance known as disguised remuneration; IR35 is a set of rules applicable to individuals who avoid paying Income Tax and National Insurance Contributions (NICs) by providing services through an intermediary, such as a Personal Service Company (PSC).

Engagers now responsible

Recent IR35 reforms in the private sector exist to ensure that any individual delivers their services via a PSC. If the individual would be classed as an employee if they worked directly with the end client, IR35 rules ensure that the worker pays income tax and NICs as any “regular” employee would.

Under this legislation, all medium and large-sized private sector end clients are responsible for deciding an individual working through a PSC’s employment status.
Previous rules allowed freelancers to determine their employment status themselves.
The official guidelines for businesses affected by these rules are as follows:

    • Give your determination and reasoning to the worker and the person or organisation you contract with
    • Make sure you keep detailed records of your employment status determinations, including the reason and paid fees
    • Have processes to deal with any disagreements that arise from your determination

If the determination results in a contractor being within the IR35 rules, it is your responsibility to deduct and pay tax and National Insurance contributions to HM Revenue & Customs via PAYE.

Where an employer incorrectly identifies a disguised employment scheme, the worker’s tax and National Insurance Contributions become their responsibility.

What businesses does IR35 apply to?

According to the Companies Act 2006, a business is defined as ‘medium’ or ‘large’ if it meets two of the following criteria:

  • The company has a turnover of £10.2 million or more
  • The company has a balance sheet total of £5.1 million or more
  • The company has 50 employees or more.

If you need any advice surrounding IR35 compliance or determining employment status, speak with one of our employment tax experts today.

Link: Understanding off-payroll working