The rules aim to “make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.”1 The rules apply where a worker/contractor provides their services through their own limited company or another type of intermediary to the client but would have been an employee were the intermediary not used.
The rules have been in place since 2000 but effective from 6 April 2021 (delayed by one year due to Covid-19), the responsibility determining whether a worker is inside or outside the scope of IR35 legislation shifts from the individual to the hiring organisation*.
*Applying to “medium” and “large” companies. A company is considered “small” if they meet two of the following criteria (1) their turnover is less than £10.2m, (2) their balance sheet is lower than £5.1m and (3) they employ less than 50 people.
How do you determine whether a worker falls within or outside of the rules?
|The hirer directs, supervises and controls the work||The contractor controls how the work is managed|
|The contractor is viewed in the same manner as existing employees||The contractor is clearly identifiable from direct employees|
|Contractor covered under the hirers insurance arrangements||Contractor has to obtain their own insurances for the work|
|Contractor will be paid regardless of the quality of their work||Contractor may only be paid if they deliver on the contract requirements|
|Mutuality of obligation||No mutuality of obligation|
|Contractor to be provided with equipment by the hirer||Contractor likely to bring their own equipment|
What are the implications for Recruitment Agencies?
The majority of recruitment agencies should have already implemented procedures to help them establish whether contractors, both for existing and future assignments, fall within the rules or not. Some of the key implications for recruitment agencies to consider are that:
- Where the recruitment agency acts as the “fee payer” for the worker and that worker falls inside IR35 they will need to deduct PAYE and NI contributions;
- Recruitment agencies should request confirmation from the hiring organisation as to whether the worker falls inside or outside of the rules, alongside their own checks;
- Employment agencies should not tell workers/contractors to use a particular scheme as a condition of getting work.
Recruitment agencies will need to consider cover for Legal Expenses if they do not have this already. Most good Legal Expenses policies (including those offered under aQmen’s RecruiterCover wordings) will pay for accountant’s fees on behalf of the recruitment agency following a dispute about compliance with IR35 and various other types of tax regulations. In addition, they will also pay for an investigation into a recruitment agencies tax affairs and the tax advice helpline can give advice over the phone about IR35.
The UK government has highlighted a number of tax avoidance schemes which try to get around these rules including some (but not all) “Umbrella” companies.
Umbrella companies act as an employer for contractors working on fixed-term contracts and then act as an intermediary between the contractor and their end client or agency.
The issue with umbrella companies arises when, rather than deducting tax and national insurance contributions from the workers’ wages, for a fee they offer “to convert income into something else (sometimes described as a ‘loan’). These schemes promise better take-home pay as a result of avoiding tax.”2