IR35: labor legislation in the UK
What is IR35?
IR35 is UK tax legislation aimed at preventing unequal tax and social security treatment of professionals ("contractors") who: (i) work for a client through an intermediary (a private limited company - this is also known as a Personal Service Company (PSC)) or otherwise) and; (ii) who would have been employees if they provided the services directly to the client (and therefore without the intervention of an 'intermediary').
If this is the case, then it is a false self-employed person who is not entitled to tax benefits that apply to the self-employed. The IR35 ensures that these professionals pay the same (wage) tax and national insurance contributions as employees.
To whom do the IR35 rules apply?
The IR35 rules apply to professionals with their own limited liability companies who are taxable in the UK.
How does it work?
By performing an IR35 check with respect to the professional hired, we can determine whether the professional should be considered an employee or self-employed for tax purposes. If the relationship leans more toward employment, the outcome is "inside IR35. If the professional qualifies as self-employed, then the outcome is "outside IR35. IR35 status is determined by a number of elements but particularly by the presence of 'personal service', direction and supervision from the client, the bearing of financial risk by the professional and the reciprocity of obligations.
The tool 'CEST' (check employment status for tax) can be used to check whether IR35 applies. See: Check employment status for tax - GOV.UK
It is not mandatory to use the tool to determine status. The tool is only valid as an aid.
What are the risks?
It is important that you as the client comply with the IR35 rules. Failure to demonstrate that you have taken all reasonable measures ("Reasonable Care") can lead to financial consequences such as an after-tax payroll tax and premium withholding and any penalties and interest imposed.
What will change?
Before this, the professional working for a client through his company (PSC) was responsible for testing whether the relationship was within or outside IR35. As of April 6, 2021, the responsibility for determining the professional's "employment status" lies with the "end user" (client). In order to determine status, the professional's agreements will be reviewed. In addition to determining the status of the professional, the following obligations apply to the client:
- Demonstrate that all reasonable measures have been taken under the IR35 test from an IR35 perspective;
- Sharing the assessment regarding the status of the professional (including substantiation) with the professional and other parties in the chain;
- Maintain records of assessments and fees paid;
- Establish a procedure (grievance mechanism) with a 45-day period for the client to address objections from the professional (and/or other parties in the chain) about the assessment of his status;
- Regularly monitor and review IR35 statuses to ensure that they are and remain up-to-date, and possibly re-run an IR35 test if circumstances change.
Implications for practice
The moment a UK independent professional working through his own limited liability company is hired, the following steps will need to be completed:
Check whether the client's company has a branch in the UK (this may be a head office, department branch or a single branch office). Note that even if the UK self-employed person is going to perform work for a Dutch branch but this client also has a location in the UK, then the client has 'UK presence' and the client is responsible for determining employment status.
See the following website for more information: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10006
Does the company not have an office in the UK? Then the responsibility for determining employment status remains with the professional.
If the client has an establishment in the UK, then check whether the client's company qualifies as a "small business. A small business is one with two of the following characteristics:
(i) annual turnover of less than £10.2m;
(ii) a balance sheet of less than £5.1m; and
(iii) fewer than 50 employees.
See the following website for more information: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10006
Does the business qualify as a small business? If so, the responsibility for determining employment status remains with the professional.
Does the client's company not qualify as a "small business" and the organization does have a place of business in the UK? Then you as the principal must determine the employment status of the professional. The outcome is recorded and passed on to the party making the payment (broker) and the professional.
Use HeadFirst Group'sStatus DeterminationStatement document for this purpose.
If the professional's status falls "within IR35" - then the contract is not settled. Indeed, this means that the professional is a false self-employed person and qualifies as an employee of the client.
Consult with your contact at HeadFirst Group to see if other options are possible.