The government introduced IR35 legislation (now frequently referred to as off-payroll legislation) in 2000. Over the last 20 years, the legislation has been amended – most notably in 2017, HMRC introduced changes to off-payroll in the public sector. And, similar changes are being introduced into the private sector in April 2021. However, what are the changes to off-payroll in the private sector, and what do they mean? We’ve produced a short overview below.
IR35 was first introduced in 2000 and is part of the Finance Act. It aims to stop ‘disguised employees’ from taking advantage of tax breaks they’re not entitled to. Some UK contractors were choosing to operate through an intermediary (single director limited company, referred to as a personal service company) to benefit from higher take-home pay retention. Essentially, these PSC contractors worked in the same way as permanent employees but were paying less tax. Rather than receiving a PAYE salary, they could pay themselves with a combination of dividends and salary. The government identified this was going on, and IR35 was introduced to stop it.
If a contractor is “outside IR35”, they’re a genuine contractor who is not operating in the same way as a permanent employee. As a result, they’re allowed to pay themselves with a combination of salary and dividends. However, if a contractor is “inside IR35”, they’re considered working in the same way as a permanent employee. Therefore, the supply chain’s fee-payer must make the appropriate deductions to their gross salary before sending them their funds.
Contractors who find themselves inside IR35 will not find themselves financially better off by contracting through a limited company. Therefore, if you’re a PSC contractor, it may be worth looking into umbrella companies as your method of receiving payment when operating inside IR35. Umbrella companies act as your employer for payroll purposes and ensure you pay the correct tax and National Insurance Contributions.
Off-payroll in the public sector (2017)
Before April 2017, contractors were allowed to determine their IR35 status. This changed when off-payroll in the public sector amendments rolled out on 6th April 2017. From this date, it became the responsibility of the end-hirer.
Off-payroll in the private sector (2021)
Similar changes to off-payroll in the public sector will be coming to the private sector shortly – next month in fact! From 6th April 2021, it’ll be the end-hirer’s responsibility to determine whether each of their temporary employees is inside or outside IR35, and they must issue them with a Status Determination Statement (SDS).
Changes to off-payroll in the private sector were originally meant to be rolled out in April 2020, but due to the coronavirus pandemic, they were delayed 12 months. The Budget 2021 was the last chance for Chancellor Rishi Sunak to put the controversial changes on hold. However, he failed to address IR35 which all but guarantees the legislation will come into effect on 6th April 2021.
Contracting through a personal service company is not coming to an end. However, most PSC contractors will no longer be able to determine their IR35 statuses and pay themselves accordingly. This responsibly is already with public sector organisations and will shortly fall on private sector businesses too*.
* There are exceptions. For example, in the private sector, assessing the IR35 status of temporary workers will only be the responsibility of “medium and large” organisations. Small businesses will be exempt, and their PSC contractors can determine their IR35 statuses. Check out the government website for more information.