HMRC’s off payroll working rules – known as IR35 – apply to those who ‘work’ for a company, without being employed by it – usually a contractor of some sort. It mainly applies to those who do most of their work for that company to the extent that to all intents and purposes they are essentially employed by that company. A good example is the self employed person who has only one client.
The IR35 rules are designed to ensure that such people pay tax, in the same way as they would if they were an employee at the company they are contracting with. Under these circumstances, the contractor’s fees will be subject to tax and National Insurance contributions in the same way that their wages would be of they were employed by the company. In essence, IR35 is a means of HMRC ensuring it gets paid the taxes that it thinks it should.
When do IR35 off payroll working rules apply?
Each client-contractor agreement must be assessed separately to determine when/if the IR35 rules apply. It is the responsibility of either the client or the contractor, normally advised by their accountants that must decide if the IR35 rules apply. The rule of thumb is if the contractor providing the service to the client is doing so much of their work for the client they should really be classed as an employee, but generally, if the individual providing the service would be ‘classed’ an employee, then IR35 rules apply.
Changes to IR35 from 6th April 2021
Previously, for workers providing a service to a client in the public sector, it has been the client’s responsibility to determine the individual contractor’s employment status to decide if IR35 rules apply. In the private sector, however, it’s been up to the contractor to decide their own employment status.
Post 6th April 2021, there is a small change, where medium and large clients in the private sector, as well as the public sector will be responsible for deciding when the IR35 rules apply. The situation for those providing services to small clients in the private sector remains unchanged.
How does IR35 affect payroll?
Any company that uses the services of an individual contractor who is not an employee, needs to be familiar with IR35. In most companies, it is likely to be the HR or the payroll department who make the decision as to whether IR35 applies to which contractor.
Again, as a rule of thumb, if the individual contractor would normally be included on the company’s payroll (usually because they do most, if not all of their work for that one client), then IR35 rules will probably apply.
How to be compliant
This is particularly important for small companies, where there often isn’t separate HR or Payroll Departments. In such cases, these roles are performed by a director or manager who is not a specialist in the area, If that is the case, the best option is to use an outsourced payroll provider to do the compliance work for you.
When an individual contractor has not complied with the rules, the contractor will have to pay the outstanding tax and national insurance, whilst penalties may include: late payment fines and additional interest.
When a client has not complied, they must pay the late payment fines and any additional interest. In addition, HMRC can levy fines for up to 100% of the outstanding, unpaid amount.
Talk to our Payroll Experts about IR35
If you are a small company and don’t have the time or resource to check you are IR35 compliant, talk to us. As outsourced payroll providers, we are familiar with all the rules, and know what to do and how to do it on your behalf. Contact us for an initial chat.