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 2021, this change was rolled out to the large and medium sized businesses in the private sector.
The rules 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 look at your relationships with contractors and consider how they work and whether this gives 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 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 to distance the contractor from your employment/HR processes.
- If the contractor has a genuine right to send a substitute, this is incompatible with employment status.
Make sure your documents are in order and give no indication of employment, but the contract is just the starting point. The relationship and the way that the contractor is treated has to be consistent with independent self-employed status.
Employment status can be checked using the HMRC online tool CEST (‘Check employment status for tax’) and HMRC say that they will stand by the CEST result as long as the information provided was accurate, and it will not stand by results achieved through ‘contrived arrangements’ designed to get a particular outcome from the service. The difficulty is that in 20% of cases the CEST result is inconclusive, which means the parties will need to seek further advice on their arrangements.