Working self-employed through an intermediary or Personal Service Company (PSC), such as a limited company or limited liability partnership, and taking income through a combination of salary and dividends, allows contractors to pay lower rates of National Insurance Contributions (NICs) and income tax compared to regular employees.
However, HMRC deemed that too many individuals were taking advantage of this tax loophole and avoiding paying the correct amount of tax and NICs. HMRC believed that many of these individuals would have been employees if they provided their services directly to the client and, therefore, should be paying the same income tax and NICs as employees.
Therefore, IR35 was introduced in April 2000 to identify contractors who avoided paying the appropriate tax by providing their services through an intermediary and were working as ‘disguised employees’. The legislation also sought to unearth businesses engaging workers on a self-employed basis to ‘disguise’ their actual employment status.
HMRC reformed the off-payroll working rules for the public sector in April 2017. The introduction of the legislation shifted the responsibility for determining the employment status from the individual working through the intermediary to the public sector client engaging them. The off-payroll reform also made the fee-payer responsible for accounting for and paying income tax and NICs to HMRC on behalf of the worker. The fee-payer is the party paying the worker’s intermediary for the worker’s services – usually, the worker’s end client or the recruitment agency.
The off-payroll working rules came into effect for the private sector from April 2021. From this point, all public authorities and medium and large-sized clients in the private sector are responsible for deciding the worker’s employment status and whether the rules apply. Like the public sector, the fee-payer is responsible for accounting for and paying income tax and NICs to HMRC.