IR35 is legislation designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company (Ltd) or Personal Services Company (PSC). Without the use of an intermediary, the worker would normally be classed as an employee. Such workers are called “disguised employees” by Her Majesty’s Revenue and Customs (HMRC).
IR35 has been around since 2000. Due to perceived widespread non-compliance with IR35, in 2017 the Government rolled out ‘off-payroll working’ rules to cover all public sector organisations. The IR35 ‘off-payroll’ rules will be extended to the private sector on 6th April 2021, directly affecting a large number of contractors.
As a leading UK-based software development outsourcing company outside the scope of IR35, Amdaris can provide you with experienced engineers who can deliver on time and budget, working remotely. Together we can mitigate the risks and costs associated with IR35.
Who is affected by IR35?
You may be affected by these rules if you are:
- a worker who provides their services through their Limited Company
- a client who receives services from a worker through their Limited Company
- an agency providing workers’ services through their Limited Company.
What happens currently in the private sector?
Since 2000, it has been the contractor who decides on the IR35 status of an assignment. This is more commonly known as being Inside IR35 or Outside IR35.
If working Outside IR35 there can be tax benefits, commonly resulting in the contractor receiving dividend payments, lowering the amount of Tax and NI payable on their income. This can all deliver higher net retention compared to if they were an employee.
Lots of contractors operating in this way are genuinely doing so and should be able to continue to do so post these changes.
What is HMRC proposing to change?
The proposed change which mirrors what happened in the Public Sector in 2017 will see the engager or end client have to decide on the IR35 status of the assignment.
The fee payer (or agency) will then be responsible for deducting the relevant TAX and NI contributions at source, before paying the Limited Company the Net amount if the assignment is determined as Inside IR35.
If an assignment is determined ‘Inside’ IR35 contractors should be paying employed levels of tax. If determined ‘Outside’ IR35 contractors can pay themselves via a combination of salary and dividends which can be more tax efficient.
What companies will be affected by these changes?
It has been confirmed that any medium or large businesses as defined by the Companies Act 2006 will have to implement the new rules.
Why is HMRC looking to make changes?
The rules have been in place since 2000, but HMRC believes non-compliance is widespread. They estimate that only 10% of those who should be applying the rules do so, which will cost the Exchequer £1.3 billion in 2023/24.
In April 2017, the government reformed the rules in the public sector to address this issue. Evidence suggests that public sector compliance is increasing as a result, with an estimated additional £550 million (based on 12 months’ worth of receipts) of income tax and NICs being raised to support the UK’s public services.
For a full breakdown of the new regulations and to see how it will affect you visit HMRC.
For UK companies who reply on contractors to boost their software development capacity, this change is going to have an impact as contractors seek to increase rates to mitigate the higher tax.
Our alternative resourcing model gives us access to the highest quality development talent in Europe and crucially this is achieved at a far more sustainable economic investment level than the more traditional resourcing and contractor models. Over the last 10 years, we have helped customers by transforming the way software development and application support is delivered.
If you would like to speak to someone at Amdaris about IR35, just get in touch.
Call +44(0)117 935 3444 or contact us using the form below. We will help you navigate IR35.
We would like to thank our friends at Computer Futures for assisting us with the material for this blog post. A range of IR35 resources can be found on their website.