IR35

IR35 is the United Kingdom's anti-avoidance tax legislation, the intermediaries legislation contained in Chapter 8 of Income Tax (Earnings and Pensions) Act 2003. The legislation is designed to tax 'disguised' employment at a rate similar to employment. In this context, "disguised employees" means workers who receive payments from a client via an intermediary, e.g. their own limited company, and whose relationship with their client is such that had they been paid directly they would be employees of the client. Under Chapter 8, the worker of the limited company is responsible for assessing their IR35 status under the rules and paying the appropriate National Insurance and Income Tax to HMRC. New legislation was introduced on 6 April 2017 (Chapter 10 Income Tax (Earnings & Pensions) Act 2003) to make public sector organisations responsible for assessing whether an individual providing services for their organisation on a contract basis fell under IR35 rules, and for paying the National Insurance and Income tax to HMRC where relevant. These rules (referred to as the off-payroll working rules) were extended to apply to private sector businesses that were classed as medium or large per the Companies Act 2006 as of 6 April 2021. This led to some lorry drivers deciding to retire, and thus contributed to the shortfall of lorry drivers in the UK.…

IR35 is the United Kingdom's anti-avoidance tax legislation, the intermediaries legislation contained in Chapter 8 of Income Tax (Earnings and Pensions) Act 2003. The legislation is designed to tax 'disguised' employment at a rate similar to employment. In this context, "disguised employees" means workers who receive payments from a client via an intermediary, e.g. their own limited company, and whose relationship with their client is such that had they been paid directly they would be employees of the client. Under Chapter 8, the worker of the limited company is responsible for assessing their IR35 status under the rules and paying the appropriate National Insurance and Income Tax to HMRC. New legislation was introduced on 6 April 2017 (Chapter 10 Income Tax (Earnings & Pensions) Act 2003) to make public sector organisations responsible for assessing whether an individual providing services for their organisation on a contract basis fell under IR35 rules, and for paying the National Insurance and Income tax to HMRC where relevant. These rules (referred to as the off-payroll working rules) were extended to apply to private sector businesses that were classed as medium or large per the Companies Act 2006 as of 6 April 2021. This led to some lorry drivers deciding to retire, and thus contributed to the shortfall of lorry drivers in the UK. In the September 2022 United Kingdom mini-budget it was announced that the 2017 and 2021 reforms to IR35 would be repealed, at a cost of £6.19 billion over 5 years. On 17 October 2022 however, the newly appointed Chancellor of the Exchequer, Jeremy Hunt, announced that the repeal would not go ahead and Chapter 10 would remain in place.

Support

The main arguments adduced in favour of IR35 are that: there are clearly cases of "Friday to Monday" — leaving on Friday as an employee and returning on Monday to the same job as a hired consultant — which would be considered to be avoiding the payment of the correct Income Tax and National Insurance; it is unfair that two workers performing the same tasks should pay different rates of Income Tax and National Insurance when there is no difference between their working arrangements; and the personal service company pays Corporation Tax on the dividends paid to the disguised worker operating through his personal service company and is considerably lower than personal Income Tax. Dividends do not attract National Insurance so therefore the worker would pay no National Insurance. The argument about workers doing the same tasks and paying the same tax is one that has often been used, but it has no basis in law. The type of work being done is irrelevant, and only the nature of the relationship between workers and hirer is examined in the courts. The dividend tax regime was changed in April 2016, pretty much wiping out the tax advantage for contractors, who now pay roughly the same amount of tax as an employee when considering the corporation tax and dividend taxes combined. The remaining issue for Government is that hirers do not pay employers NI of 15% (13.8% prior to April 2025) when hiring the self-employed.

Criticism

IR35 has been strongly criticised by several bodies, including former Ernst & Young tax partner Anne Redston. Some of the key criticisms levelled at the measure include: IR35 does not achieve its stated aim of taxing those within IR35 at the same level as employees since those within IR35 also pay Employers' NI in addition to Employees NI. This results in higher levels of tax being paid by those within IR35. Its complexity and its harmful impact on many small companies that exist for reasons other than tax avoidance or evasion. These include many companies owned by IT professionals, who often have many short-term contracts rather than one steady engagement. That its effects extend far beyond the Friday to Monday scenario envisaged in the original press release, which indeed has never been discussed much since. IR35 ignores the risk taken on by freelance workers, e.g. no guarantee of work, no sickness or pension benefits. Each contract that the Intermediary company undertakes is viewed separately, which means that one contract with client A could be considered disguised employment and a contract with client B considered to be non-employment. HMRC is reluctant to give an opinion on a contract at the time of signing the agreement on the basis that the actual working terms and conditions, in reality, could be considerably different from the terms of the agreement. Many contracts between the Intermediary company and the client company are generic and rarely go into the details of the actual nature of the work to be undertaken and the working arrangements between the two parties. That it is unjust that workers in small family businesses should be taxed as if they were employed by their clients, yet not receive any of the legal, state, and other benefits received by "normal" employees. HMRC requires the Intermediary company to state whether it is inside or outside IR35 on the annual P35 declaration leaving the company with the responsibility to engage an expert to decide the company's tax liability. Many businesses now feed off these Intermediary companies promising that they will help negotiate an IR35-friendly contract, however, it is not just the contract that HMRC considers but the actual working arrangements between the worker and the client business. There is little evidence that it raises any significant amount of money. It renders small businesses uncompetitive with large consultancies and encourages the use of off-shoring avoidance schemes, most of which HMRC now pretends they have closed, leaving the worker with a huge tax bill. Umbrella scheme arrangements remain commonplace in 2021, as shown in multi-media adverts in airports and the like. The calculation of a "deemed payment" under the legislation is considered very complex: the calculation involves 11 separate stages, some of which are recursively dependent on others. The introduction of IR35 combined with its complexity and ambiguity, led many freelancers into a number of Tax Planning schemes that led to a further loss of revenue to HMRC; however over the recent years these tax planning schemes have been closed down by HMRC. From April 2020 to April 2021 the vast majority of corporates shifted the self-employed from contracts onto fixed-term PAYE contracts as they decided that the risk of an HMRC investigation on their use of contractors/temporary workers was too great. This has resulted in further tax revenue losses as Employer NICs have been taken off many temporary worker's PAYE contracts in addition to the VAT and Corporation Tax loss to The Revenue. In May 2017, NHS Improvement backtracked on previous guidance that all NHS agency and locum workers would be included in the IR35 taxation laws. The new guidance stated that NHS organisations should assess workers on a "case by case basis". This u-turn was in response to an exchange under the pre-action protocol of Judicial Review by IHPA (then known as the Locum Doctors Union). Many NHS locums such as nurses, physiotherapists and doctors below consultant level in the NHS are automatically deemed to be employees, a practice which has attracted strong criticism from the industry as reportedly unlawful and is at odds with numerous judgments in which courts have found doctors to be self-employed. There has also been significant criticism of blanket approaches in national newspapers - both in terms of the lawfulness of the practice and asserting that it is driving workers into loan schemes. Many workers in the social services sector also supply their services through their own limited companies which would be considered disguised employment by HMRC if the circumstances were such that a court might consider the arrangement akin to employment.

Effectiveness

It is hard to judge the effectiveness of the legislation since as of 2010 HMRC has not published any figures. On 6 January 2004 Dawn Primarolo was asked in Parliament how many investigations under the IR35 regulation have (a) been initiated, (b) resulted in additional revenue, and (c) been concluded without securing additional revenue. In a written answer she replied that it was not possible with any accuracy to isolate data relating solely to this legislation. On 15 June 2009 in the House of Commons Labour MP Terry Rooney (Bradford North) asked the Chancellor of the Exchequer "how many investigations concerning IR35 were launched in each of the last five years; and how many of them resulted in (a) prosecution, (b) an increase in tax due and (c) no further action". Kitty Ussher speaking for the Chancellor replied, "The intermediaries legislation, commonly known as 'IR35', was introduced with effect from 6 April 2000 to counter the avoidance of employed levels of tax and national insurance by individuals providing their services through intermediaries. Disclosure of HM Revenue and Customs compliance data relating to the legislation would result in a risk of non-compliance with the legislation. Accordingly, I am not able to provide the data requested." The July 2009 issue of IT Now, the British Computer Society magazine, reported that between April 2002 and March 2008 the Government had raised £9.2 million under IR35 legislation compared to the £220 million that was initially expected.

Revenue raised

The initial regulatory impact assessment for IR35 in 1999 stated that HMRC expected the measure to generate £220 million per year in National Insurance contributions and a further £80 million in income tax. On 6 Jan 2004 Dawn Primarolo was asked by the Shadow Paymaster General Mark Prisk MP about additional revenue secured from investigations under IR35. She replied that "Establishing whether or not the intermediaries legislation applies is undertaken as part of the Inland Revenue's Employer Compliance Review programme. As such it is not possible with any accuracy to isolate data relating solely to this legislation." She gave a similar answer when asked about administration and employment costs. In May 2009 the Professional Contractors Group received a reply to a request under the Freedom of Information Act to HMRC, asking just how much tax revenue IR35 had in fact raised for the exchequer. The FOI reply revealed that in the tax years 2002/03 to 2007/08, IR35 directly raised just £9.2 million. This equates to an average of around only £1.5 million per tax year, less than 1% of the expected amount. It is not clear whether this includes the NI contribution, or is just income tax. In September 2011 a Freedom of Information Act request revealed that the number of cases reviewed had fallen from 158 (year ending April 2007) to 12 in the year ending April 2010 and 23 in the year ending April 2011. The same document also gives the "tax yield received for the requested years" as having fallen from £1,906,619 to £219,180. No details are given for the costs of the investigations or the costs of collecting the tax. It is not clear whether this figure relates to the revenue raised from investigations or the total revenue from IR35. No figures were given for the cost of administrating the tax, or the cost of the investigations.

Public sector reform

Until April 2017, it was the responsibility of a contractor's limited company (PSC) to deal with the process of determining the IR35 status (separately, for any and all labour-only contracts that the PSC had entered into). Any associated Tax and NI liability fell on the PSC. However, in the Chancellor's Autumn Statement in 2016, the government intimated that it would reform what it calls the "Intermediary Legislation". On 6 April 2017, a reform of the IR35 was introduced by HMRC in the public sector. It became the responsibility of the public authorities employing contractors to determine the contractor's employment status for tax purposes. The reform was introduced by HMRC to "ensure that individuals who work through their own company pay broadly equivalent taxes as employees, where they would be employed if they were taken on directly". An online tool (known as "CEST": Check Employment Status for Tax) was made available by HMRC to enable workers or employers to determine employment status for tax purposes. A revised version of the tool was issued in November 2019 following a stakeholder consultation exercise. CEST has received some criticism in that the contractual concept of "mutuality of obligation" does not figure within the CEST assessment. HMRC defended the exclusion of mutuality of obligation (or "MOO") as a factor in its IR35 Forum meeting with industry representatives on 11 December 2017, arguing that it could be assumed that anyone using CEST was already aware of a contractual obligation being in place. HMRC estimated it raised an additional £550m in income tax and National Insurance Contributions in the first year following the introduction of the reform.

Private sector reform

HMRC estimated the cost of non-compliance with the IR35 legislation in the private sector to be £1.2bn annually by 2022/23. It announced the extension of the IR35 reform to medium and large companies in the private sector and charities, applicable from 6 April 2020. The end client was given responsibility for assessing whether the person was an employee. This was irrespective of whether there were one or more intermediaries between the worker and the end client. The end client was also made responsible for paying lost National Insurance if they made an incorrect assessment. On 17 March 2020, it was announced that the reform to the private sector would be postponed to 6 April 2021 due to the COVID-19 outbreak. The reforms became effective on 6 April 2021. Following the introduction of the private sector reform, there have since been multiple tools to help those inside IR35 determine what their take home pay could look like.

Section 8(1) decisions

National Insurance Regulations state that only 'The Minister' can make determinations of status, of the sort that are required to establish IR35 liability. Therefore a PSC is entitled to ask for a Section 8(1) decision, where it is unable to agree on IR35 liability with HMRC. The obstacle to this remains that HMRC has created no process whereby a Section 8(1) decision can be requested. The legislation can be found at: https://www.legislation.gov.uk/uksi/2000/727?timeline=false. Anyone who uses HMRC's "CEST" tool, and finds that the status of their contract cannot be determined could seek a Section 8(1) determination, and request acknowledgment that they have made such a request. This would protect them from any later suggestion that they have not taken due care in establishing IR35 status.

See also

Umbrella company UK labour law UK tax law Freelancer Independent contractor Independent contractor-employee distinction

References

External links

HMRC (British government) Employment Status Manual HMRC (British government) IR35 Page

Text derived from https://en.wikipedia.org/w/index.php?oldid=1364653918 under CC BY-SA 4.0; modifications have been made.