The rules to counter this very specific type of alleged tax avoidance were first outlined as long ago as 1999 and have actually been enshrined in law since the Finance Act of 2000 was published. Although the 2000 legislation gave HMRC the power to impose tax at PAYE rates on contracts, they were unable to enforce the rules to their own satisfaction, and the change on 6 April 2021 is passing the responsibility for enforcing the regulations to the end user in a supply chain.
So, where are now and what does the law mean to you?
IR35 regulations apply where an individual supplies their services to an end user via an “intermediary”. Regulations do not apply where you are using the services of an individual who you pay directly. The tax treatment of those payments is subject to the normal PAYE rules, which require you to decide whether the relationship with the individual has the hallmarks of employment, or the worker is a truly independent freelancer.
Where you are paying an intermediary, which is usually the individual’s personal company, it is currently the responsibility of the individual to decide whether the IR35 regulations apply to the contract with you.
From April 2021 the onus on deciding whether a contract is within the scope of IR35 moves from the individual worker to the end user in the supply chain. If your business is the end user in the chain, you would only be required to make the decision under the changed regulations if the business was considered to be a medium or large company.
As a general guide, if a company can tick two or more of the following it will not be considered to be large or medium size:
- Balance sheet valued at less than £5,000,000
- Turnover of less than £10,000,000
- Fewer than 50 employees
However, even if your company qualifies as a small entity, you could find yourself in a chain between a worker and an end client, for which the end client makes the determination that IR35 applies to the relationship with that worker. In that situation, the determination passes down the chain and it is the last entity in the chain before the worker’s personal company that is responsible for calculating and paying the PAYE charges due under IR35. That would mean that your company becomes liable for the employer National Insurance attracted to the contract with the worker’s company.
On the face of it, the ‘new’ regulations might look quite daunting, but of course, we can help so please call or email if you have any concerns or queries, as ever we are here when you need us.
Tel: 01276 25542