If you’re an employer and you use the services of contract workers who operate via intermediaries, you need to know the ins and outs of IR35. This important piece of legislation has big implications for businesses as well as contractors themselves.
Essentially, the point of IR35 is to stop contract workers from taking advantage of favourable tax arrangements which are not intended for their use. It is intended to curb tax avoidance among contractors – but the businesses who use them also have responsibilities in relation to IR35.
In this blog, we’ll take a closer look at what exactly IR35 is, what it means for employers and what obligations they have under this legislation.
What is IR35?
IR35 is a piece of tax legislation, introduced in 2000, which is intended to ensure prevent tax avoidance by workers who provide services via an intermediary, such as a limited company (generally known as a personal service company, or PSC).
The legislation was implemented to ensure that regular employees and contractors working in a similar way to employees, but using an intermediary, pay basically the same level of income tax and National Insurance contributions.
So, some contracts are described as being ‘outside IR35’ – which means that contractors are responsible for paying their own income tax and National Insurance – while others are ‘inside IR35’, where employers are responsible for ensuring tax and NI contributions are paid.
What does IR35 mean for employers?
IR35 requires employers to assess the employment status of any contractors who work for them through an intermediary. The legislation effectively places a responsibility on employers to accurately determine the tax status of contractors and ensure that taxation obligations are complied with.
If a contract falls within the purview of IR35 – that is, it is ‘inside IR35’ – then employers are responsible for deducting the appropriate level of taxation and National Insurance payments from the contractor’s remuneration before paying them. Employers that fail to do this may face penalties.
What responsibilities do employers have under IR35?
Employers have a range of responsibilities under IR35. These include:
Determining employment status:
Employers are required to accurately assess whether a particular contract is inside or outside IR35. This means that employers must evaluate the nature of the working relationship and determine if it resembles that of an employee or a genuine contractor.
Providing a status determination statement:
Employers which engage contractors through an intermediary must provide a status determination statement, or SDS, which declares the contractor’s IR35 status for that particular contract; in other words, whether the job is inside or outside IR35. The SDS must also include reasons to explain how and why the employer has determined whether the job is subject to IR35.
Deducting taxes and NICs:
For contracts that fall within the scope of IR35, employers are responsible for deducting the correct amount in income tax and National Insurance contributions from the contractor’s fee before paying them.
Keeping records and reporting to HMRC:
Employers must keep records relating to employment status determinations, including any SDS provided to contractors and details of any payments issued to them. Employers must also report any payments made to contractors working inside IR35 to HM Revenue and Customs (HMRC).
Implementing IR35 dispute processes:
Employers must also have procedures in place for handling IR35 status disputes, in case a contractor chooses to challenge their status determination. Contractors have the right to challenge their IR35 status if they consider it to be inaccurate, and end clients are responsible for creating and implementing their own status dispute processes (although these must conform to certain minimum requirements).
Employers hiring contractors working through intermediaries must ensure that IR35 regulations are complied with. Where they fail to ensure compliance, clients hiring these contractors may be punished in the form of penalties and fines issued by HMRC.
To ensure compliance with IR35 and avoid potential penalties and other legal consequences, employers must make sure that they fully understand their obligations under the legislation. A thorough understanding of how IR35 works can help businesses keep both contractors and HMRC happy, while ensuring that they’re able to bring in the talent they need, as and when they need it.
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