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Off payroll working rules known as IR35 for workers

by Stephanie Gover

The IR35 rules were introduced in the year 2000 by HM Revenue & Customs, and although they have changed slightly in recent years, there is no sign of them going away any time soon. This article focuses on IR35 for workers.

The responsibility to ensure each relationship is IR35 compliant is now on the engager where the engager is not ‘small’. Where the engager is ‘small’, this responsibility remains with the worker.

A small company is defined according to the Companies Act 2006 as one that meets two out of the three following criteria:

  • turnover not more than £10.2m
  • gross asset balance sheet value not more than £5.1m
  • not more than 50 employees.

For any new and ongoing contracts, the engaging company will need to review your relationship and determine whether the IR35 rules apply. If it is decided that the rules do apply, you will be issued with a status determination statement and will begin to receive payments net of withheld tax.

If you believe that the engaging company has made an incorrect determination, and the IR35 rules do not apply to your engagement, you are able to appeal their decision.

When IR35 applies

IR35 applies to personal service companies or partnerships that act as an intermediary between the personal service provider (i.e. the individual providing the service) and the end-client where the relationship is considered to be similar to that of a traditional employee-employer relationship. There are very similar rules for when the intermediary is not an incorporated company or partnership, but is instead a sole trade. Workers in this situation would need their employment status determined in the same way, as they could still be subject to PAYE if their relationship is deemed to be employee-employer.

There is no statutory test for employment status and instead, each relationship must be looked at individually. For a deemed employment status, all fundamental factors must apply, as follows:

  • personal service – is the individual obliged to personally carry out the work?
  • supervision, direction, and control – Does the end-client have control over how and when the services are provided?
  • mutuality of obligations – Is there an obligation for work to be offered and for this to be carried out?

If all three of the above factors apply, then there are many secondary factors that should be considered. The secondary factors, however, are only used to paint a picture, and are not a checklist. Where all of the fundamental factors apply then it may be hard to argue that IR35 does not apply.

Please be aware that IR35 applies to the true relationship and not the contract. If the contract does not reflect the true reality of the relationship then it cannot be used to argue employment status. If IR35 applies, the personal service provider will be taxed as though they were an employee.

Employment law

It is important to note that IR35 refers to tax law only. End-clients will need to review all contracts to determine the employment status in employment law too. A worker could be deemed self-employed for tax purposes, even if they are deemed employees in employment law. Individuals who are deemed employees in employment law will have employee or worker rights.

Action required

If you believe that there is a risk of your engaging company making an incorrect determination, please send Lee Styles or Stephanie Gover a copy of your contract and they will carry out a review to ascertain the likelihood of these new rules affecting you.

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