IR35 rules were introduced in 2000 to apply in cases where someone would have been treated as an employee, had they not been working through a limited company in which they had a ‘material interest.’ It’s often referred to as ‘off-payroll’ working.
According to HMRC, they are ‘Intended to stop individuals avoiding employment taxes by working through their own company. This affects contractors including IT consultants, management consultants, and project managers.’
Over the last months, there have been several tax tribunal cases involving IR35 contractors – one high profile case going against BBC Look North presenter, Christa Ackroyd, and another going against HMRC, in favour of an IT contractor who had worked on the Universal Credit programme for the DWP.
HMRC have found it difficult to enforce their view of the applicability of IR35, so the government is consulting on how to increase compliance. The consultation hinges on the premise that ‘Current legislation is not working effectively. The cost of non-compliance in the private sector is high and growing – projected to increase from £700 million in 2017/18 to £1.2 billion in 2022/23.’ Looming large is the question of whether rules brought in for public sector engagers in 2017 should be adapted for private sector engagers.
In April 2017, changes introduced in the public sector made the end user responsible for making a decision as to whether IR35 rules apply, and then deducting and paying tax due. HMRC believe this has increased compliance in the public sector – as well as raising an additional £410 million in income tax and National Insurance contributions. HMRC research suggests public sector employers have not taken an unduly cautious approach, generally assessing employment status on a case-by-case basis.
No firm decision about extending IR35 decision-making responsibility to the private sector has been made. HMRC also emphasise that ‘The fundamental principles of the off-payroll working rules – that the employment status test determines who should be taxed as employees’ are not currently up for discussion. The focus is simply how to facilitate compliance in the private sector in the light of results from the public sector reforms.
Whilst HMRC estimates that two thirds of those working through a company are genuinely self-employed, and outside the scope of the rules, decisions about employment status can be very difficult. The rules are complex, involving consideration of such criteria as mutuality of obligation, the degree of control exercised, and the right of substitution.