The changes to off payroll working have been a long running saga. What are the current rules and what do the changes mean? This article will go through the timeline of events and explain what this means for businesses.
Put simply, the IR35 system was put in place by Gordon Brown and was designed to ensure that people in “disguised employment” paid the appropriate level of tax. For instance, a person who was paid through a personal service company but was being treated like an employee would be classified as being inside IR35. The responsibility for making the decision if a person was captured by IR35 was on the contractor themselves.
This legislation did not lead to the government receiving an influx of income and the suspicions were that the rules were largely being ignored. The solution to this was to move the responsibility from the contractor to the end user (the business to whom the contractor was supplying services).
This came into force in 2017 for the public sector and the private sector was due to follow suit in April 2020. Due to COVID this was delayed until April 2021.
This shift in responsibility applied to medium and large businesses. That definition is met if two of the following statements apply: the business has an annual turnover of £10.2 million, a balance sheet of more than £5.1 million and has more than 50 employees.
The end user needs to exercise “reasonable care” in making the decision on the applicability of IR35 with hefty penalties for getting it wrong. This change led to some companies banning the engagement of contractors or making blanket inside IR35 decisions.
It was welcome news to many businesses when Kwasi Kwarteng’s mini budget included a promise to reverse these changes and put the responsibility back to contractors. However, this has now in turn been quashed by the new chancellor Jeremy Hunt.
In conclusion, for now, the status quo remains. Businesses must make sure they are taking care when deciding whether IR35 applies. It is important to note that if HMRC were to investigate a case of suspected “disguised employment” they will look at the reality of the situation. Therefore, there is no magic clause that can be inserted into contracts to make sure that contractors are not captured by the rules.
If you have any questions on any of the issues raised in the above article, please contact Natalia Milne.