What is IR35?
What is a “dispersed” or “umbrella” or a “virtual” legal service provider?
IR35 is the short name used for the ‘intermediaries legislation’, which is a set of tax rules that apply to you if you work for a client through an intermediary – which can be a limited company or “personal service company” which is how many contractors operate.
If you are caught within the legislation then you can expect to pay about 25% more in tax every year, so you want to try and ensure that it does not apply to you!
Despite having been in force since 1999, it is heavily criticised by tax experts and the business community as being poorly conceived, badly implemented by HMRC and causing unnecessary costs and hardships for genuine small businesses.
- Introduced in April 2000. Being reformed in April 2017.
- If you are caught, you will pay circa 25% more in tax
- Based on complex employment case law
- Should not affect professional contractors
- Beware: Take professional advice to avoid
What will these rules require?
From April 2021 when the IR35 rules apply, if you are a genuine professional contractor, freelancer, interim or consultant who is in business on your own account, you should have nothing to fear from IR35. This is so long as you take the time to understand how the legislation works and apply best practice to ensure it does not apply to you, and have a defence prepared if investigated by HMRC.
For income tax and NIC purposes, the lawyer will be treated as having an employment with the central firm rather than the lay client. This will require the central firm fee-payer to operate the rules for tax and NICs in the same way as for a normal employee. The off-payroll lawyer will be legally required to provide their National Insurance Number, tax code and identity details to enable the correct tax to be deducted.
On or before the central fee-payer makes a payment to the lawyer’s PSC, the fee-payer will have to complete the normal Real Time Information (RTI) process and notify HMRC of the amount of the taxable earnings and the tax and NICs deducted.
Will there be exceptions from IR35 working for small firms?
Yes. Firms that are classed as “small” organisations will not be affected by the reform and will not need to decide the status of the off-payroll lawyers they hire or to operate IR35. They will need to use the existing statutory definition within the Companies Act to determine whether or not a corporate client is small. This definition is in section 382 of the Companies Act 2006 and provides the Companies Act definition of “qualifying as small”. The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements —
- Annual Turnover not more than £10.2 million
- Balance sheet total not more than £5.1 million
- Number of employees not more than 50
The reform will apply to all firms who do not qualify as small under the test set out in section 382 (including those small companies which are excluded from qualifying as small despite meeting the requirements). Companies in small groups as defined by section 383 of the Companies Act will also qualify as small for the purposes of the April 2021 changes.
How can I tell if I will be affected?
HMRC offer an on-line tool called Check for Employment Status for Tax or CEST to help Clients decide if PAYE should be applied to the fees paid to PSC.