The Evolution of IR35 & your Business – Are you protected?

Summary

Recent developments in The Intermediaries Legislation “IR35”, are placing an increased burden upon end client companies. This blog will provide a general summary of the purpose and origins of IR35, before detailing how we can help your business, as well as considering the more recent developments and how these may affect you moving forward.

 

Background

The Intermediaries Legislation, more commonly known as IR35 was introduced in 2000. It has been used predominantly as a tool for targeting the abusive use of Personal Service Companies (PSC’s) operating within the IT and the Energy sector.

Although the legislation is focussed towards one-man companies, there is actually no statutory definition of ‘Intermediary’. Individuals, partners, and companies can all be regarded as intermediaries for the purposes of the legislation, and as such it’s important that all related parties to this type of contractual arrangement are aware of their legal standing and related compliance obligations.

Traditionally the legislation has operated to classify income generated from contracts caught inside the IR35 rules as “deemed employment payments”, on the basis that it is essentially employment income. Under this arrangement the burden of responsibility to disclose these “deemed payments” lay solely on the contractor. As such, “deemed payments” have not been readily disclosed in the past, due to the significant PAYE and National Insurance costs that would apply.

 

Onshore Intermediaries

The mutually beneficial use of onshore intermediaries is the typical practice in the world of independent consultancy, where a one man company uses an agent to contract with end client companies. This is favourable for an end client company, who can avoid liability to pay National Insurance contributions at 13.8%, as well as related costs of employment, such as redundancy pay, parental pay, holiday, sick pay, and pensions. Additionally, it benefits the independent contractor who can achieve a higher day rate, as well as the flexibility to channel remuneration efficiently through both salary and dividend payments.

The means of determining the true nature of these contractual chains has rested predominantly on case law, and primarily the well-established doctrines of; mutuality of obligations (the duty to go to work and the duty of the employer to provide work), control (the degree of independence the worker has), and right of substitution. It is unnecessary to discuss the intricacies of these elements in further detail here, however, whether you are an end client company, or independent contractor, this is an area of compliance that we can assist you with at AAB.

We can provide a contract review service to all related parties in the contractual chain: whether it be end client company, contractor, or agent. Furthermore we can provide a schedule detailing whether we consider the arrangement to be IR35 compliant, as well as providing proposed amendments that will operate to mitigate the chances of being caught within the scope of the legislation.

 

Recent Areas of Development

Offshore Intermediaries

In recent years the practice of employing UK based workers, operating in the UK through offshore employers has grown significantly. Although these arrangements are often created for wholly commercial reasons, the abusive use of this employment structure to avoid Tax and NI obligations has become prevalent. It is of significant importance, as often the workers and end users of the workers services are unaware that these arrangements are in place, leaving them vulnerable to unexpected PAYE and NI costs.

Under the new rules introduced in 2014, where an “employer” is based offshore and the worker is providing their services to an onshore end user, the UK based agency, which is contracting with the end user, is ultimately responsible for PAYE and National Insurance contributions. If there is no UK based agency the end client (if UK based) becomes responsible, so being fully aware of the contractual chain and who is managing the tax and National Insurance compliance is critical, otherwise it becomes costly.

If this arrangement sounds familiar to any employment structures that you have been operating within your business, you may be open to significant compliance costs on behalf of the contractor working under your control. Please contact us for any advice on how to mitigate the effects of the IR35 rules, or related queries.