Intermediaries legislation (known as IR35) is the tax and National Insurance (NI) legislation that may apply if an individual works for a client through an intermediary. This is a common arrangement for consultants and some agency workers. The IR35 regime was introduced as a way of cracking down on the use of intermediary companies to disguise employment thereby avoiding income tax and NI. IR35 requires individuals working through such an intermediary, normally a Personal Service Company (PSC), to pay broadly the same PAYE and NI as other employees. If IR35 applies, the sums received by the intermediary are treated as employment payments by the intermediary to the worker, and are therefore subject to deductions.
Following the introduction of the Finance Act 2014, more stringent criteria apply to the assessment of whether work invoiced to by a PSC to an end user (i.e. employer or engager) gives rise to an income tax liability. Under Section 16 of the Finance Act 2014, if an individual personally provides services to a client, all remuneration is to be treated as earnings from that employment for income tax purposes. HMRC has also offered comprehensive guidance on the employment status of individuals through the Employment Status Manual.
What emerges from both the guidance and case law is that both the contracts in place and the reality of the business relationship will be considered when assessing whether IR35 applies.
On 17 July 2015, HMRC published a discussion document on improving the IR35 regime. The Government confirmed that the legislation is ineffective as non-compliance is widespread, estimating that there are 265,000 PSCs and only 10,000 people paying tax under IR35. The result is that people are paying different levels of tax depending on whether they are employees, self-employed or work through a limited company.
The consultation paper highlights challenges facing IR35 including the fact that there is insufficient clarity concerning each party’s responsibility for cooperation with HMRC interventions and the industry which has “grown up advising companies on how to ensure their contracts fall outside of the legislation.”
It is in this context that the government invited views on the current IR35 system and sought comment concerning proposals designed to improve its effectiveness including, most interestingly, proposals for end users to take a greater role in ensuring compliance with IR35.
What is clear from the consultation paper is that the government is considering making significant changes to IR35 which may include placing the onus on the end user when determining whether an IR35 tax liability arises. It is not possible to quantify the risks or determine the cost of such reforms at this early stage but if the burden for ensuring compliance is indeed reversed, this could mean the introduction of criminal and/or civil penalties for non-compliance. It may also mean end users are obliged to revise current contracts and work practices to ensure compliance with the law.
The consultation has just closed so we will await confirmation of next steps.
If you have any further queries, please contact a member of the Employment Team.