IR35 came into effect in April 2000 with the aim of stamping out a deemed form of tax avoidance where contractors would seek to avoid paying tax and National Insurance Contributions by supplying their services via an intermediary (usually a personal services company) and paying themselves in dividends.
It applies in situations where:
- the contractor personally provides services via a personal services company, and
- where the contractor would be an employee of the end-user for tax purposes if the personal services company was not between them.
If both criteria are met then the personal services company would be responsible to account for PAYE and NI deductions.
In April 2017 the rules were changed so that in the public sector the tax and NI liability shifted from the personal services company to the end-user where the above criteria were met.
With effect from April 2020, this change is being rolled out to the private sector so the tax and National Insurance liability will shift from the personal services company to the end-user.
Although this change is some way away, Companies who engage contractors in this way would be well advised to begin preparing for the change now.
The rules only impose liability where the contractor would be an employee of the end-user if the personal services company were not between it and the contract. It is important to start looking at your relationships with contractors and doing all you can to avoid giving the impression of employment.
What should you consider?
- Ensure that the contractor works on their own account, ideally they will have their own terms of business, other employees (than the contractor you engage) and work for other companies.
- In the best case, the contractor will be engaged for a fixed discrete task as opposed to having an ongoing, open-ended changeable role within your organisation.
- The contractor should have control over how they complete the task and a degree of autonomy.
- The contractor should perform the role with minimal supervision and not be treated in the same way as staff, ideally performing a different role to your staff.
- If possible, your commercial or legal team should handle the engagement of contractors and agreeing their terms rather than the HR department.
- Make sure your documents are in order and give no indication of employment, but remember that the contract is just the starting point. HMRC will look beyond the wording of the contract and check that the way that the contractor is treated consistent with independent self-employed status.