IR35 – Get prepared for the start of the tax year
27 April 2021
What is IR35?
- IR35 was the number of the Budget press release in March 1999, which announced the introduction of anti-avoidance legislation from April 2000
- It was introduced to counter the avoidance of tax & NICs by individuals providing their services via a personal service company (or partnership)
- Personal Service Company (PSC) – where the majority of income derives from work performed personally by the shareholder(s)
- IR35 is a “look through” provision
- It asks a simple hypothetical question: “if the limited company did not exist, would the relationship between the end client and the worker be that of employer and employee?”
How did IR35 work up to now?
- Until 6 April 2021, in the private sector it was the Personal Services Company (PSC) which decided for itself whether IR35 applies
- If IR35 applies, the PSC was responsible for applying PAYE & NICs to the ‘deemed employment payment’ received under the contract – including the liability for employer’s NICs
- The ‘deemed employment payment’ was effectively the minimum salary that must be processed by the PSC – which prevented the shareholder extracting the money in the form of dividends
What has happened?
- From 6th April 2021, responsibility for making IR35 decisions will fall onto medium and large private sector clients (or any public sector client) rather than the worker’s PSC
- If IR35 applies, the liability to operate PAYE & NICs will fall onto the fee-payer, rather than the worker’s PSC
(the client and the fee-payer are often, but not necessarily, the same person)
When does IR35 apply?
- The hypothetical question is applied to each contract separately:
- If the hypothetical relationship between the end client and the worker would be that of employer and employee, then IR35 applies to that contract
- If the hypothetical relationship between the end client and the worker would be that of self-employment, then IR35 does not apply to that contract
- The client is the organisation for whom the worker’s services are provided
- Where the client is medium or large and has a ‘UK connection’ the client is responsible for making the IR35 decision and issuing a ‘Status Determination Statement’ (SDS) to the worker and the next person in the chain
- If the client is small or does not have a ‘UK connection’ then the original IR35 rules continue to apply – responsibility for making the decision and applying PAYE/NICs remains with the worker’s intermediary (the PSC)
- A person has a UK connection if immediately before the beginning of the tax year the person is either:
- resident in the UK; or
- has a permanent establishment in the in the UK.
- The fee-payer is the lowest ‘qualifying person’ in the chain above the
- worker’s intermediary
- Note that a chain may consist of several persons
- A ‘qualifying person’ is defined as being one who:
- has been given a copy of the status determination statement (SDS) (issued by the client to the worker) by the person immediately above them in the chain is resident or has a place of business in the UK
But is not:
- controlled by the worker or his associate(s) (ie the PSC)
- a company in which the worker or his associate(s) have a material interest (5% or more) (ie the PSC)
- Each person in the chain must pass on the Status Determination Statement (SDS) to the next person in the chain below them
- Failure to do so will result in them being defined by the legislation as the fee-payer and liable to operate PAYE and NICs
- If there is a non-resident person (e.g. an offshore agency with no place of business in the UK) in the chain, it will be the person immediately above them (and who is present in the UK) that is the fee-payer.
How does the fee-payer apply PAYE & NICs?
- PAYE/NICs are applied to the ‘deemed payment’ as if the worker was a direct
- employee of the Fee-Payer
- No entitlement to SSP/SMP/SPP/SHPP etc
- No deduction for Student Loans will apply
- RTI returns should show the ‘Off Payroll Worker’ marker
- The Fee-Payer is liable for the employer’s NICs/Apprenticeship Levy
- Payment of the net amount is made to the PSC
- Full VAT is also paid to the PSC
- At the end of the year/contract, a P60/P45 should be issued in the worker’s name
- Deemed direct payment
- Take the payment, net of VAT
- Deduct any direct cost of materials
- Deduct any allowable expenses, as if the worker was an employee (optional)
Treatment in the PSC
- The net payment received can be paid out as either salary or dividend with no further tax deduction (RTI returns, ie FPS still required)
- The gross amount of the deemed payment is not treated as income of the company
- s141A CTA 2009
- “not required to be brought into account in calculating the profits of the trade”
- Similar provisions where the intermediary is a partnership
- s164B ITTOIA 2005
Treatment for the worker
- The worker will receive a P45/P60 from the Fee-Payer
- The worker will report the income on an Employment Income page of the Self Assessment Tax Return as if they had been a direct employee of the Fee-Payer
- Any salary or dividends paid out of the PSC in respect of that contract are not reported on the tax return
How does the client decide whether IR35 applies?
- “if the intermediate company (or companies) did not exist, would the relationship between the end client and the worker be that of employer and employee?”
- Apply the normal Employment Status Tests to the hypothetical relationship..
- IR35: Get prepared for the start of the tax year
- Employment Law has 3 possible status outcomes:
- Self Employed
- Tax & NICs (IR35) has only 2 possible status outcomes:
- Self Employed
* ‘Worker’ status conveys employment rights such as holidays & NMW etc but not necessarily PAYE/NICs for HMRC purposes
To know more go to cronertaxwise for more details.