The off-payroll working rules, commonly known as IR35, hinge on whether you’re considered to be an employee or a true contractor.
The rules initially rolled out to the public sector in April 2017, before being implemented in the public sector at the second time of asking in April 2021.
The legislation aims to ensure that if you work like an employee, but through a company, you pay similar levels of tax to others on payroll.
By reforming the IR35 rules in both the public and private sectors, the Treasury expected to recoup around £1.3 billion by 2023/24, although that estimate was made before the COVID-19 pandemic.
Who do the rules affect?
Most (89%) public-sector contracts fell outside of the scope for IR35, according to Qdos Calculator, although that does not take into account contractors who left the public sector before the rules took effect.
In the private sector, initial estimates from HMRC expect around 60,000 private-sector businesses and 20,000 recruitment agencies to have taken on new responsibilities since April 2021.
As many as 170,000 contractors in the private sector who operate through their own personal service companies (PSC) will also be affected, along with some charities and third-sector organisations.
Who is responsible for IR35?
All public-sector authorities, such as government bodies, schools and universities, local authorities, and the NHS, are responsible under IR35 rules.
These rules also affect medium and large-sized organisations, third parties or intermediaries, some charities, and incorporated contractors in the private sector.
HMRC uses a test to determine whether the IR35 rules apply to a public-sector body or private-sector organisation. They will be considered ‘small’ and therefore exempt if they meet two of the following criteria:
- annual turnover of less than £10.2 million
- a balance sheet of less than £5.1m
- fewer than 50 staff.
If they exceed two or more of the three criteria and they engage you as a contractor, the public-sector authority or private-sector organisation will be responsible for:
- determining your employment status
- paying your PSC or other intermediary
- deducting income tax and National Insurance contributions (NICs) at source before paying you
- paying employers’ NICs.
Determining employment status
Public authorities and medium or large-sized private sector organisations should use HMRC’s check employment status for tax (CEST) test to see if the IR35 rules apply to a contractor.
This should help engaging firms determine whether or not you should be classed as an employee or as self-employed for tax and NICs purposes on a specific engagement.
Occasionally, the CEST test can deliver an inconsistent result, mainly due to the second iteration of the tool continuing to exclude any concession for the mutuality of obligation.
Mutuality of obligation exists with employment contracts as employees are obliged to work for their employers, and the employers are obliged to provide work for them. But this is not the case with the self-employed.
The CEST test should be used to determine your employment status before you enter into each contract or piece of work with an authority or organisation.
There’s far more to IR35 than meets the eye and Blue Shore is here to help you with any aspect of the off-payroll working rules.