The government introduced the ‘Intermediaries Legislation’ in the year 2000. It is commonly known as ‘IR35’.
In very general terms, IR35 will be in point where for example, Fred is working regularly for the Bovit Group via his personal service company, Fred Limited.
Bovit Group → Fred Ltd → Fred
For IR35 to be applicable and for Bovit (a large engager) to have the need to deduct PAYE and NIC from Fred Ltd’s fees, Bovit will have to determine that Fred would be a deemed employee of themselves if he worked directly for them, rather than via the protection of his company.
Bovit Group → Fred
From 6th April 2021, the IR35 landscape changed massively. Prior to that date, the responsibility, in the private sector, for determining employment status under IR35 lay with the personal service company rather than the engager.
The responsibility for IR35 status determination suddenly, from that date, then moved to medium and large businesses who were engaging personal service companies. Small business engagers still do not have to make the status determination when they engage PSCs. This remains the responsibility of the PSC itself.
A small engager, for the purposes of IR35, is where at least two of the following apply:
- Annual turnover of not more than £10.2 million
- Balance sheet total of not more than £5.1 million
- Not more than 50 employees
Accordingly, if the engager, X, has figures greater than the above, then it is now responsible for deciding if Bob would be a deemed employee of themselves if he was hypothetically working directly for them as an individual, rather than through his company Bob Limited.
If X decides that the relationship comes within IR35, then it has to deduct PAYE and NIC from the fees rendered to it by Bob Ltd. It will also cost X employer’s NIC of 13.8%, rising to 15% from 6th April 2025.
It should also be noted that, even though the PAYE and NIC is deducted from the fees of Bob Limited, for tax purposes it is treated as Bob’s personal employment income. At the end of the fiscal year in question, Bob will be given a P60 form from X and Bob will have to put the relevant figures on his own self-assessment tax return, with a credit for the PAYE deducted.
The problems with these new IR35 changes that many accountants have experienced since 6th April 2021 is that some engagers have applied and deducted IR35 in cases where the engagement is clearly outside the IR35 net. This incorrect classification will end up costing the engager a considerable amount of employer’s national insurance contributions which in reality are not payable.
Example
I was previously asked to help an accountant who contacted me because his client, a car valet company, Joe Ltd, had been advised by the group engaging it that they were going to bring the engagement within IR35.
Northern car accident repair group (N) → Car valet company (Joe Ltd) → Joe
N repaired the cars and then asked Joe to valet them before they were collected by the client.
Joe collected the cars from Northern and drove them back to his own premises where he valeted them. Joe Ltd took out the relevant insurance to cover him whilst in possession of and working on these vehicles.
There was no control over Joe by Northern regarding the way that he cleaned the cars, it was left entirely up to him. Joe could turn down work offered to his company by N if at the time he was working on other contracts. Additionally, there was no obligation for N to have to regularly give work to Joe Ltd. It was therefore agreed that there was no mutuality of obligations between the parties. If there were any complaints about Joe’s work (which was very unusual), he would go back to Northern and rectify the position for no further payment.
Joe did have a substitute Freddie, who in terms of car valeting, was at the same technical level as himself. If Joe used Freddie, then Joe Ltd would still bill N and Freddie would in turn invoice Joe’s company.
Joe received a status determination from N, stating that they were going to apply PAYE and NIC to Joe Ltd’s fees under the IR35 legislation.
In view of the above factors, I assisted Joe’s accountants in appealing the decision. In the end, we had to have a meeting to resolve the issue.
I pointed out to N that there were many factors that indicated that if Joe had been working directly for N, he would have been a deemed self-employed individual, namely:
- No control over Joe by N
- No mutuality of obligations
- Joe Ltd pays its own insurance
- Joe has (and uses) a substitute Freddie who is at the same technical level as himself
- Joe rectifies any complaints and mistakes in his own time for no further payment
Eventually, N agreed that IR35 was not in point and did not deduct PAYE and NIC from Joe Ltd’s fees. We managed to nip this in the bud before the tax and NIC was incorrectly applied… A laborious process however!
The above example just goes to show that IR35 can be (and is) incorrectly applied and deducted by engagers in practice. Businesses need expert advisers to take them through the IR35 minefield, to ensure that the correct treatment and decisions are made.
I will be presenting a live IR35 webinar on behalf of Gravita on Wednesday 15th January 2025 from 9am – 10am. The webinar will explain in greater detail how IR35 works and the planning that can be undertaken to avoid it.
To join the webinar please sign up here.
