What is IR35

IR35 was introduced in 2000 to ensure that individuals who work off-payroll through their own company (or other intermediary as defined in legislation), who would have been taxed as employees had they been paid directly, pay employment taxes on their income. Under these rules the limited company is currently required to assess whether IR35 applies and, if it does, to account for income tax and national insurance on the payments that it receives for the engagement.

The rationale for change?

The government has estimated that only one in ten PSCs who should be operating the rules on at least part of their income are doing so. They believe that public sector bodies should be doing more to ensure that those who work for them off-payroll pay the right amount of tax.

Effect of the new public sector rules

Under the new rules, where the client receiving the individual’s services is a public authority, responsibility for determining whether IR35 applies will move from the intermediary to the public authority or, if there are agencies or third parties in the contractual chain between the public authority and the intermediary, to the party closest to the intermediary in that chain. In addition, where the legislation applies, responsibility for operating PAYE and accounting for income tax and national insurance will fall on the public authority (or relevant third party).

Does it affect my organisation?

The draft legislation uses the definition of “public authority” set out in the Freedom of Information Act 2000 (or equivalent Scottish legislation). This covers:

  • government departments;
  • the NHS
  • local authorities;
  • police forces;
  • educational establishments including universities

Significantly it does not apply to private companies delivering public services, including charities, or to registered housing providers.

Impact

The new legislation is likely to have a significant impact on public authorities. They will need to have systems in place for checking the status of any off-payroll engagements. HMRC is producing an online digital tool which is intended to help assess whether engagements fall within the scope of IR35, but this is not yet publicly-available. 

Payments to intermediaries will need to be processed by the public authority through payroll under real time information and this may increase administrative requirements such as obtaining the national insurance number, P45 from previous employment, date of birth and personal address for staff working through intermediaries.

Where intermediaries are provided through a third party such as a locum agency, the new rules require the public authority to inform the third party whether it considers the IR35 legislation applies.

Where public authorities fail to comply with the new rules they may be liable to interest and penalties from HMRC.

When do the new rules take effect?

The new rules will apply to payments made on or after 6 April 2017. This includes payments in respect of contracts entered into before 6 April 2017 which continue in force after this date (and also payments made after this date in respect of work undertaken prior to this date).

How can Capsticks help?

We are offering a menu of services to support employers in meeting the challenge of the new IR35 rules. These include:

  • An audit of existing intermediary contracts to determine whether they are “in scope” for the new rules;
  • Training for your HR and Payroll teams on the requirements of IR35;
  • Template clauses to include in your agreements with agencies in order to discharge your notification obligations and protect your organisation from potential liabilities.

For more information or to discuss the support that will be most suitable for your organisation please contact: Peter Edwards, London; Jacqui Atkinson, Birmingham; Andy Uttley, Leeds.