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What is the IR35 regime and why does it matter?

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The IR35 regime was introduced by HMRC to avoid individual contractors escaping paying tax as an employee by operating through a personal service company.

Under the rules, if the contractor would be deemed to be an employee of the client but for their personal service company, they must pay tax as if they were an employee. Public sector clients have been required to deduct tax at source when IR35 applies since 2017.

On 5 March 2019, the government published its policy paper and consultation on extending the rules on deducting at source to include the private sector from April 2020.

The responsibility for determining the employee status of individual contractors for tax purposes will rest with the client or “would-be” employer. If the client decides that the contractor is an employee for tax purposes, they or the entity that pays the contractor’s intermediary will be responsible for operating PAYE. The client must share the determination with the contractor and provide reasons if requested. Companies that qualify as “small” under existing company law will be exempt from the new rules.

HMRC has developed an online tool for assessing employment status for tax purposes, which is widely used by public sector bodies. One advantage to using the tool is that, if accurate information is entered and you act in line with the determination, HMRC will be bound by its decision. HMRC has promised to look at enhancements to the tool, and the guidance which sits alongside it, before the changes come into effect next April.

The consultation is open until 28 May 2019 and private sector companies that rely on contractors would be well advised to review their current arrangements with consultants and intermediaries and start to make preparations ahead of next year.