R35: Changes to the UK’s off-payroll anti-tax avoidance rules
The IR35 legislation, which has been in force since April 2000, targets single-owner managed companies (or personal service companies (PSCs)) where the owner works for the end client as a consultant but in reality is treated as if they were an employee.
The personal service company is used as a shield so that neither the end client nor the individual pay national insurance contributions (NICs). The effect of the IR35 legislation is to compel the contractor to assess whether the individual is in reality employed or self-employed and apply the appropriate tax treatment.
However, the IR35 legislation does not apply if the end client is an individual and the services are provided for purposes other than the client’s trade or business.
If, in reality, the individual who owns the PSC believes they are employed by the end client, the PSC would have to pay employer’s national insurance and the remaining available amounts would be treated as salary with an appropriate deduction for employee NICs. The total amounts are treated as paid at the end of the year.
If the individual has a number of engagements with one client, and is deemed to be an employee of that client, all monies received from that one client are treated as forming part of one employment. To compensate for expenses incurred in running the PSC, the legislation allows for a flat deduction of 5% of turnover as an expense.
There were some subsequent discussions and amendments to IR35 since it entered into force in 2000 but no significant changes were made until April 6 2016, when the responsibility to check whether a person was employed or self-employed was transferred to the end client if it was a public sector entity.
Further changes are being introduced, which are scheduled to apply from April 6 2020, when the responsibility to determine the employment status will shift to medium and large companies in the private sector. For further details on these changes and practical advice on how to implement them, see this article.
To summarise, the IR35 legislation has now been in force for nearly two decades. The changes from April 2020 are not complex from a tax perspective, but they could significantly change the way companies work and the UK employment market. To begin with, it may be resource intensive to make the company fully compliant with the new rules and preparation now is key to ensuring future compliance.
Mala is a Chartered Tax Adviser with significant tax experience working with ex-HMRC inspectors. Her network through the London Tax Society and other forums ensures she retains links to HMRC and remains up to date on HMRC policies. Her experience includes resolving tax enquiries, CoP8 and 9 Investigations as well as disclosures for a range of taxes and situations; self -employment, property, owner managed businesses and non-UK domiciled individuals.
She is a well-known tax author, having had several articles published in Taxation Magazine, International Tax Review and Tax Adviser. She founded the London Tax Society in 2017 and actively encourages networking and technical development for young professionals.
Mala will also be speaking at the CIOT Indirect Taxes Conference on VAT Investigations and at the CIMA on IR35 in February 2020 – click on the links for more details and to book your place.
Later in the year, Mala will also be speaking on HMRC Investigations and HMRC Information notices for the CIMA. Further links to these events will be posted in due course.
To contact Mala, her email: is firstname.lastname@example.org