Knowledge

Who determines your IR35 status and who pays employment taxes?

Posted on Oct 30th, 2018 | Tax

Following changes introduced by HMRC for the public sector in 2017, and further changes announced for the private sector in the 2018 Budget, responsibility for determining your IR35 status, and who pays Income Tax and National Insurance Contributions (NICs) to HMRC depends on the sector you operate in.

In the public sector, responsibility for determining your IR35 status lies with the end client (or agency) who pays your limited company. If your contract is inside IR35, the end client (or agency) will pay Income Tax and NICs (employers and employees) to HMRC

In the private sector, until April 2020, it is the responsibility of the limited company being contracted to do the work to determine whether a contract is inside or outside IR35. If the contract is inside IR35, the limited company will pay Income Tax and NICs to HMRC.

How does IR35 affect payments made by agencies?

Often an agency will be used to work between the end client and a limited company (and worker) which can complicate the flow of funds and deductions for Income Tax and NICs. The following illustrates the differences between the public sector and the private sector where an agency is involved.

Inside IR35 within the public sector (when an agency is involved)

  1. End client pays the agency in return for work done by the limited company (its worker)
  2. End client is responsible for determining IR35 status of the worker (because the end client is best placed to establish employment status based on contract and working practices)
  3. If inside IR35, the agency pays Income Tax and NICs (employers and employees) to HMRC and pays the net amount to the limited company (because the agency disburses payment to the limited company)
  4. The limited company pays the net amount to the worker by way of a tax-free dividend or salary.

Inside IR35 within the private sector (when an agency is involved)

  1. End client pays the agency in return for work done by the limited company (its worker)
  2. Agency pays the contracted amount to the limited company
  3. The limited company is responsible for determining the IR35 status of the worker
  4. If inside IR35, the limited company pays a deemed employment payment to the worker. This payment will have Income Tax and Employees NICs deducted and paid to HMRC. The limited company will also have to pay any Employers NI that’s due.

Proposed changes to IR35 in the private sector from April 2020

The government recently held a consultation into off-payroll working in the private sector. In the light of this, the chancellor announced in the 2018 Budget that the public sector rules would be extended to the private sector.

The changes will shift the responsibility for making IR35 status assessments from the intermediary providing the worker (i.e. the limited company) to the agency or the end client who pays the limited company. However, after some difficult legal cases and issues with HMRC’s online tool for checking employment status, the government has decided to proceed with caution.

The proposed changes for IR35 in the private sector are that from April 2020:

  • Businesses will be responsible for assessing an individual’s employment status
  • The reform will not apply to the smallest 1.5 million businesses
  • The reform will apply to large and medium businesses who will be given longer to adjust, with the changes being introduced in April 2020
  • From 6 April 2020, medium and large businesses will need to decide whether the IR35 rules apply to an engagement with individuals who work through their own limited company
  • Where it is determined that the rules do apply, the business, agency or third party that pays the individual’s limited company will need to deduct income tax and employee NICs and pay employer NICs to HMRC
  • HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform, and businesses’ decisions about whether their workers fall within the IR35 rules will not automatically trigger an enquiry into earlier years
  • HMRC continues to work with stakeholders to identify improvements to checking employment status for tax and issuing wider guidance to ensure the reform meets the needs of the private sector. Enhancements will be tested with stakeholders, operational and legal experts before implementation.

A further consultation on the detailed operation of the reform will inform the draft Finance Bill legislation that is expected to be published in summer 2019.

Need more IR35 advice?

Our handy IR35 guide goes through everything that will be assessed to determine whether or not you’re compliant with the law. Download it now and read it whenever and wherever you like!

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Written by Ross Bramble

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