Intermediaries legislation, or IR35, has been in effect since April 2000 in order to combat tax avoidance in the UK.
IR35 aims to underline the difference between a legitimate self-employed worker and a ‘disguised employee’ in order to identify cases of tax avoidance.
IR35 status has received a lot of media attention, in particular with the recent Uber trial. It saw two freelancers of the taxi app actually being treated as employees, without receiving any of the benefits.
How IR35 determines a self-employed worker from a ‘disguised employees’ has come under fire by contractors ever since its inception, with constant calls for it to be changed or axed. While IR35 hasn’t been dismissed by the government, the 2015 Summer Budget confirmed that changes will be made to the legislation.
What are the changes?
The main change to the legislation is who will determine the status of IR35. Previously, the contractor or self-employed worker were responsible for determining their own IR35 status. From April 2017 this responsibility shifted to the end client. At the time of writing, this will apply only to the public sector, though a private sector rollout is in the pipeline.
The changes have only been presented as a draft, but essentially the process includes:
End client being responsible for determining if the engagement is inside or outside IR35
The end client will advise any other parties involved in the contract on how to proceed
If the contract is determined to be outside IR35 the worker can continue to work as agreed
If the worker is found to be within IR35 the PSC must deduct PAYE, NI and pay employers’ NI
The worker will receive credits on the deducted tax and can receive funds from the PSC
In short, the worker found to be within IR35 will become almost an employee of the end client for tax purposes. This means they will not receive any employee benefits such as holiday pay or sick pay, but will continue to operate through their own limited company.
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