IR35 in the Private Sector – Off-payroll

IR35 is the common term for the Intermediaries Legislation, a tax legislation introduced to combat a form of tax avoidance whereby contractors are providing their services similarly to employees but through an intermediary, usually their personal service company (PSC). HMRC believed that many contractors were operating as ‘disguised employees’ and were incorrectly describing their employment status as ‘self-employed’. The legislation was introduced to ensure contractors working similarly to employees would pay the same income tax and National Insurance Contributions (NICs) as their permanent counterparts.

Before April 2017, contractors operating via a PSC were responsible for determining their own IR35 status and paying any employment taxes due. However, in 2017, off-payroll in the public sector was introduced, and it became the responsibility of the public sector organisation engaging the contractor to determine their employment status.

On the 6^th of April 2021, the off-payroll changes were extended to the private sector. Since that date, medium and large-sized private sector clients are responsible for determining the employment status of the contracts it enters into with private sector workers. In addition, the fee-payer (the organisation paying the PSC) is responsible for making deductions for income tax and NICs and paying these to HMRC before making a net payment to the contractor for the work completed.

As part of the off-payroll reforms introduced in 2021, the end client (also referred to as the decision-maker) is responsible for determining the IR35 status of the contractors they engage. The end client will conduct a thorough IR35 assessment before declaring the contractor’s status by issuing a Status Determination Statement, also referred to as an SDS. An SDS must be issued for every contract agreed with a worker operating through an agency or independently. A new SDS must also be issued if the terms of the engagement or working practices change mid-way through a contract. When completing an assessment, private sector end clients will consider the following:

• Substitution: are you required to provide the services personally, or can you send someone to complete the work in your place?
• Mutuality of obligation: is the end client obliged to offer work, and are you obliged to accept it?
• Control: what level of control does the end client have over how and when you complete the work?

The only exception to the rules is small private sector clients who are not responsible for deciding the IR35 status of the workers they engage.

It is highly recommended that both the contractor and their recruitment agency always keep a copy of any status determination issued for future reference. If a contractor or deemed employer (typically the agency) disagrees with the status determination reached by the end client, it is possible to dispute the decision. Here’s what you should do, according to government guidance:

1. Contact the end client with the details of the IR35 determination you believe is incorrect and why.
2. Put forward your argument for the status determination you believe is correct, listing the specific reasons and examples that relate to your contract and working practices.
3. Make sure you keep a record of all letters, emails and written correspondence, the date your determination was made and the date you disputed the decision.

You can raise a dispute until the last payment is made for the contracted services. The client must respond to your determination dispute within 45 days of receiving it. During this time, your original determination will stand. After considering your dispute, the client will tell you if the determination has changed or remains the same.

If a contract is outside IR35, it has been determined following a review that the end client deems you as operating independently of the end-hirer and are genuinely self-employed. As such, you can be engaged via your limited company and would be paid gross for any work completed. Operating outside IR35 means you are not subject to PAYE by the fee-payer and can pay yourself in a tax-efficient manner via a combination of salary and dividends. You are also able to claim back any legitimate business expenses.

If your assignment is inside IR35, you have some options:

• Continue working through your limited company – you could continue to contract in the private sector through your limited company and accept the lower take home pay you will receive. You will not be able to claim certain business expenses compared to operating outside IR35. Income tax and NICs will be deducted at source by the fee-payer before making a net payment for the work completed.
• Negotiate a higher rate – you could negotiate a higher rate to compensate for the loss in take home pay.
• Switch to umbrella – switching to a compliant umbrella company means you won’t have to pay any dividend or corporation tax on top of paying employees NICs and income tax. You will also benefit from employee benefits unavailable to you when contracting through a limited company. Find out more about switching to umbrella.
• Look for an assignment outside IR35 – it is still possible to be engaged on assignments outside IR35, and it is important to negotiate your contracts accordingly with end clients.

It is highly recommended that you speak with a professional tax advisor before making a decision if your contract is deemed inside IR35. You can also contact us to discuss your payroll options.