As IR35 approaches 25 years of impacting the UK employment market, recent reforms and high-profile investigations bring the complex legislation firmly back into the spotlight.
But what is IR35 - and, more importantly, when does it impact businesses?
Introduced in April 2000 under then-Chancellor Gordon Brown, IR35 is a piece of legislation that aims to prevent contractors who are hired to work closely with the same companies on a routine basis from avoiding perceived tax obligations.
The act essentially aims to differentiate when a contractor is hired on an ad hoc basis and when they are a ‘disguised employee’ - i.e. they work very closely with one or more companies on a regular, routine basis and could be considered an employee through an association.
IR35 became even more burdensome for businesses seeking to hire contractors in 2021, during which time the onus of liability was changed from the contractor itself to the fee-paying party, such as the employer.
IR35 has, in short, not been well received by contractors or employers. For contractors, it can be perceived as a double-taxing of their outgoings, whereas it now adds an extra compliance burden to employers.
As many as 62% of UK contractors vow not to work with companies that are bound by IR35 legislation (which affects the public, private and voluntary sectors) and almost a quarter seek to circumvent it by working with overseas companies instead of British businesses - which confirms warnings from the Public Accounts Committee that it is essentially eroding accessibility to labour for British businesses.
The tax is perhaps one of the lesser-understood legal loopholes that an increasing number of contractors and business owners are falling victim to, generating around £1.5 billion per year for HMRC.
Jeremy Vine is one of the more recent high-profile faces to come under the government’s scrutiny for allegedly breaching the terms of IR35, for working closely with the BBC on a number of contracts in 2013/14 and 2015/16 - which HMRC believes to constitute him as a BBC employee during that time in all but name. Vine contests this assertion, claiming that the “intermediaries legislation does not apply, and the amounts are estimated and excessive”.
While some celebrities, such as Gary Lineker, have successfully rebutted HMRC’s claims, others like Eamonn Holmes have been less successful - with the latter being forced to pay a bill of circa £250,000.
IR35 fines, when enforced, are the equivalent of a contractor paying PAYE tax - so approximately 20-45% of your income, depending on your gross salary. The aim is to ensure that contractors pay roughly the same amount of Income and National Insurance as an employee would.
Importantly, employers can only be classed as falling under these rules if the contractors they use lend their labour to them through the use of an intermediary, or personal services company (PSC). This applies only to incorporated businesses, so a sole trader cannot be held liable for IR35.
Since the recent reforms to IR35, an estimated 200,000 workers have moved from Contractor status to ‘employed’ - which can mean less take-home pay after NI and PAYE contributions. Worse still, by shifting liability to the companies hiring contractors instead of the workers themselves, it opens businesses up to hefty fines, including:
The tax continues to be one that confuses many businesses, with over 67% of businesses admitting to wanting the government to scrap the complicated rules in favour of clearer legislation. However, while IR35 can be complex, it is not indecipherable.
For expert advice on IR35 and how to ensure absolute compliance with its off-payroll working rules for your company, get in touch with our team today.
