‘What is IR35?’
The off-payroll working rules, or IR35, aim to ensure that off-payroll workers (OPWs) contracting their services to organisations pay the same amount of tax, including national insurance contributions (NICs) as workers employed by the client to fulfil the same role.
To improve compliance, the rules were recently updated to make assessing contractors’ employment status the responsibility of organisations using their services. If any worker is a ‘deemed employee’, the organisations paying them will be responsible for PAYE and NICs.
There are some exceptions for small, private sector businesses, but the rules cover almost everyone else.
‘What does IR35 compliance require?’
The off-payroll working rules require organisations using contractors operating through personal service companies (PSCs) to assess the employment status of the individuals, instead of leaving it to contractors. If someone is considered an ‘employee’ the organisation is liable for PAYE.
‘What is an employment status assessment?’
An employment status assessment is the process of determining if a PSC contractor is working in the same capacity as an employee.
‘When did the off-payroll working rules change?’
Some changes were introduced for the public sector in April 2017, but didn’t impact the private sector. In April 2021 the full set of changes were mandated for both the public sector, and for medium to large private business. This roll-out was delayed from April 2020 because of COVID-19.
‘Does IR35 apply to sole traders?’
IR35 doesn’t apply to sole traders. The rules cover anyone operating through a personal service company, but sole traders aren’t distinguishable from their business and declare their tax liabilities in annual returns. Organisations have always been required to confirm sole traders’ status, with consequent PAYE liabilities.
Off-payroll working obligations aren’t limited to IR35 scenarios, they extend to all individuals not on PAYE: directly engaged, agency, umbrella company, or other intermediary arrangements.
‘Can I stay outside IR35?’
The only legal routes for organisations to stay outside IR35 are either not using intermediaries or making arrangements that wouldn’t come under the rules, such as fully outsourcing services. Caution is critical as HMRC may view these arrangements as lack of reasonable care, or even deliberate non-compliance.
‘What is CEST?’
Check employment status for tax (CEST) is HMRC’s own tool for performing assessments. It’s free to use and HMRC will stand by it if all information is correct. There’s been some criticism of its accuracy, especially the high percentage of ‘undetermined’ classifications and its failure to consider mutuality of obligation (MoO). Use of CEST isn’t mandatory and other tools are available.
"Statistics released by HMRC show that only 80% of IR35 assessments run through CEST produce an 'employed' or 'self-employed' outcome. The other 20% return a ‘cannot determine’ outcome, which leaves the user in limbo."
‘How is HMRC actually approaching IR35 compliance?’
HMRC promised a ‘light touch’ approach to compliance with the new rules for the first twelve months, but this ended 6 April 2022. Now, all organisations covered by the off-payroll working rules may receive full penalties for errors in compliance, or outright failure to comply.
For answers to all your questions on managing IR35 compliance, get in touch with our employer solutions team.