IR35 refers to the Inland Revenue (now HMRC) press release which was issued on 09 March 1999. This outlined plans to clamp down on the growing use of Personal Service Companies (PSC), where the ‘owner’ provides a service to a client, as a ‘disguised employee’, but operating under the tax benefits of a limited company.
IR35 came into force on 06 April 2000, as the ‘intermediaries regulations’ under Schedule 12 of the Finance Act 2000. These provisions were effectively replicated in Part 2 Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003.
IR35 applies under the following circumstances;
• A worker is engaged by a client (directly or via an agency),
• The worker operates through his ‘own’ intermediary PSC,
• The worker personally performs services for the Client,
• The worker has a material interest in the intermediary PSC,
• The worker can be classed as an employee, that is;
– Under the Supervision, Direction and Control of the Client,
– Works specific times and / or hours,
– Is remunerated a stated rate of pay,
– Contracted for a specified period of time.
The worker essentially forms ‘part of the Client’s organisation’ and, in this instance, IR35 would apply. Where IR35 applies, then the ‘services’ are treated as though the worker were an employee, (disguised employment) for tax purposes.
Previously it was the responsibility of the 'intermediary company' to determine whether IR35 applies and to meet appropriate tax liabilities.
From April 2017, however, that responsibility in the 'public sector', moved to the party that paid the intermediary PSC, either the client or agency. 'Public sector' was interpreted as an organisation which broadly came under the Freedom of Information Act. From April 2020, the same 'rules' apply to the 'private sector' as well.
In terms of NEC ECC contracts, the resource would be treated as an employee for taxation purposes but not under the Schedule of Cost Components. Amounts paid by the Contractor for a person 'inside IR35' would need to include Class 1A (Employer) National Insurance contributions.
This would mean assessing and determining the status at the outset, otherwise a determination from 'outside IR35' to 'inside IR35' could result in financial liabilities which are not recoverable.
Most agencies and consultants are familiar with the IR35 issues, although recent court and tribunal cases would suggest that the 'rules for determination' require further clarification, although in principle if a resource, operating through a PSC, is continuously fulfilling a particular role on a project then it is most likely that they would be 'inside IR35', subject to the tests previously stated.