IR35

IR35 and Off-Payroll Tax

IR35 is the name given to tax legislation aimed at increasing the amount of tax paid by contractors working through a personal service company (PSC). IR35 was introduced in April 2000 and was a response to the ever-increasing trend in working “off-payroll” through a PSC, and paying less tax.

Originally PSCs were largely confined to certain service sectors such as IT specialists and management consultants. In recent years, it has expanded to many more sectors such as drivers and nursing.

Instead of paying their owner remuneration in full as a salary, PSCs can pay a mixture of salary and dividends. As dividends were subject to lower tax rates and no National Insurance, the net remuneration is substantially greater. A further benefit is the PSC can claim more expenses than an employee. For example, the cost of commuting is not an allowable expense for an employee but is for a PSC.

The IR35 legislation allowed HMRC to tax the owner as if they were an employee, ignoring the normal limited company tax rules. At least that was the intention; successive court cases ruled against HMRC. The legislation was effectively unenforceable and widely ignored.

This changed in April 2017. HMRC successfully changed the laws for PSCs working in the public sector. The PSC and the organisation they were working for (either the client organisation itself, or the agency if one was used) were left with no choice but to apply IR35 rules. The only exceptions were where they could provide substantial evidence the nature of the engagement fell outside IR35. This is very difficult to do; very few contract staff were allowed to continue as PSCs.

HMRC are rolling the new rules out to the private sector. This had been scheduled for April 2020 but has been delayed until April 2021 by Covid.

IR35 cannot be ignored. Before the new measures, contractors could effectively decide for themselves if they were inside or outside IR35. Now the organisation (agency or end client) who makes the payment to the PSC has to assess the contractual arrangement. The usual outcome is they decide the contractor is inside IR35.