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Who determines your IR35 status and who pays employment taxes?

Posted by Ross Bramble on Jan 30th, 2020 | IR35

Who determines your IR35 status and who pays employment taxes? - a freelancer writing notes | Crunch

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

(Note: Due to the Covid-19 outbreak, the government has postponed the scheduled changes to the rules surrounding IR35 in the private sector. These will now be introduced on 6th April 2021, a year later than planned.)

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 if you have one) will pay Income Tax and NICs (employers and employees) to HMRC.

In the private sector, until April 2021, it is the responsibility of the limited company to determine whether a contract is inside or outside of 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 involved in the labour supply chain 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 for the 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.

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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. 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 2021

The government held a consultation into off-payroll working in the private sector. The changes were confirmed in the Budget held in March 2020, but then the COVID-19 crisis brought about an abrupt change of mind and the Chancellor Rishi Sunak announced a 12-month delay. Meaning that the changes to IR35 will not be brought in until April 2021.

The changes, when finally introduced, 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 CEST 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 2021:

  • Businesses (end-clients) 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 only apply to large and medium businesses who will now be given longer to adjust, with the changes being introduced in April 2021
  • From 6th April 2021, medium and large businesses will need to decide whether the IR35 rules apply to an assignment 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 National Insurance Contributions (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.

So although the changes have been delayed by a further 12 months, business and contractors still need to ensure that they understand IR35 and the impact the changes will have. Our IR35 Hub has all the information you need, whether you’re an end-client, recruiter or contractor. Crunch has a range of products and tools to help you navigate IR35 and get the best possible outcome for your business.

Need more IR35 advice?

Our “What is IR35?” hub is the place to head for all things IR35 – we have an independent IR35 Calculator tool to help you see if you’re at risk from IR35, a jargon-free IR35 business guide as well as articles explaining everything you need to know about IR35. For Crunch clients, we also have an IR35 service for those looking for our expert guidance.

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