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How to Comply with the New Tax Rules

IR35 Changes

IR35 is a legislation that governs the payment of tax and national insurance contributions from private contractors, ensuring they are paying the same as regular employees – a responsibility that now falls within the remit of the business that’s recruiting them.

In 2017 the government made a significant change to IR35, passing the responsibility of reporting ‘working contract status’ and tax and NI obligations, from contractors over to employers. This was rolled out within the public sector but in April 2020 will be extended to cover the private sector, bringing everything in line.

What is IR35?

IR35 was designed to regulate contractors and freelancers who carry out work for an employer on a permanent or full time basis, but through a limited company that they own, known as a PSC (personal service company). Essentially in the absence of this PSC they would be classed as an employee and subject to tax and NI contributions through PAYE. As a result of a rise in contractors using this disguised working set up to avoid paying national insurance, the government has clamped down, estimating that this would cost the private sector £1.3bn by 2023.

Since the turn of the century the onus has been on the individual contractor or freelancer to report their IR35 status and NI obligations but this didn’t really work and non-compliance has been a growing issue. In 2017 this switched to employer responsibility.

How do employers assess IR35?

Employers are now responsible for assessing the IR35 status of any contractor. The aim is to show differentiation between the role of an employee or a contractor. If you are a business recruiting contractors, you need to ask yourselves a few questions about the work you are contracting out: is the position you are recruiting for covering a previous member of staff? Are the days or hours set and regular? Does the position include company perks? Is the position permanent or temporary?

If you recruit a contractor who could be deemed to be a regular employee and you do not make it clear, or the conditions of employment favour that of a regular member of staff, you could be liable for paying their tax and NI contributions and could end up with a fine.

When employers are recruiting for a position, they need to first assess whether the position is likely to be an employed PAYE position. A contracted position is more likely to be something that is short term (such as project work), temporary and requesting skills that can’t be covered in-house. If they are confident that the position is appropriate for a contractor then under IR35 they need to report the contracted position to HMRC to negate responsibility for any NI contributions.

For more information on IR35 visit the HMRC website.