IR35 is UK tax legislation designed to combat tax avoidance by workers, and the firms hiring them, who are supplying their services to clients via a personal services company (PSC), such as a limited company, but who would effectively be an employee if the PSC was not used.
From April 2021 responsibility for determining the IR35 status of an engagement and the appropriate tax and NI contribution shifts from the worker’s personal service company (PSC) to the end client.
IR35 was introduced to tackle the problem of ‘deemed employment’. This is where organisations engage workers on a self-employed basis and usually through an intermediary, rather than via an employment contract, so they become deemed, or “disguised”, employees.
The financial impact of IR35 is significant. If a contractor shifts to PAYE arrangements on their existing rate it can cost them thousands of pounds in additional income tax and NICs, reducing their net income by up to 25%. Similarly, the engaging organisation loses significant savings as they have to pay employers’ NICs of 13.8% and offer employment rights / benefits.
To reduce their exposure to financial and reputational risk arising from IR35 errors, some large organisations have made blanket decisions to cut their contractor workforce and/or move contractors onto lower paid PAYE arrangements. In turn, many contractors are choosing to simply walk out of their current engagements as it is no longer financially viable for them to stay.
The biggest concern is that without correct application of IR35 rules, genuine contractors can be mistakenly assumed to be within scope of IR35, leaving both the worker and the client worse off going forward.
Unless new solutions to agile resourcing are found, businesses will not only see their hiring costs soar, but will likely lose highly skilled mobile resources and become less responsive to the rapidly changing demands of their operational landscape.
There are 3 key factors that place a contract outside of IR35:
The contractor’s right to put forward an appropriate substitute to complete work on their behalf.
The contractor’s ability to control how they complete the work and their working patterns.
The contractor’s obligation to ‘put things right’ at their own expense if the work is deemed substandard.
According to HMRC all IR35 decisions should be conducted on a case-by-case basis using the online CEST tool:
https://www.gov.uk/guidance/check-employment-status-for-tax
This tool has come under criticism from industry experts for excluding some key status indicators whilst being over-reliant on others, often providing inconclusive results.
To establish the true IR35 status of an engagement, a balanced view should consider contractual compliance with CEST criteria, the reality of the working practices involved and relevant case law.
