What are the IR35 rules?
IR35 off-payroll rules apply if a contractor operates through their own personal service company (PSC) or other intermediaries. HMRC has not defined a PSC, but it usually means a limited company where the sole or majority director and/or shareholder provides the services of the company.
Sometimes, the hiring employer will have a contract with a PSC but in reality the relationship looks more like that of an employer and employee, since it is the same contractor providing the services each day. Under IR35 law, this person is considered to be a ‘deemed employee.’
What is the impact of IR35 law on employers?
The government tool ‘check employment status for tax’ can help you decide if the contractor should be classified as employed or self-employed for tax purposes. If IR35 applies, the employer must collect tax and National Insurance Contribution from sums paid to the PSC and pay them to HMRC – essentially as PAYE taxation.
The responsibility for determining IR35 status rests with the end client, as does the resulting tax liability. As a result, many small businesses automatically are classifying PSC workers as inside IR35, even though this may not deliver the best results for their business.
If a business fails to make an IR35 determination or gets it wrong, the liability for income tax and NICs will sit with the employer until the determination is completed. There’s also the risk of HMRC investigation, penalties and legal proceedings for non-compliance.