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The first and key thing to distinguish is that ‘IR35’ is just the term coined to cover all things well… what we know as IR35!
From a technical position IR35 has two sets of legislation, the original ‘Intermediaries Legislation‘ and then the newer ‘Off-Payroll Legislation‘. However, most people refer to them as one and the same, calling it ‘IR35’.
Both sets of legislation are contained with the same legislation, the Income Tax (Earnings and Pensions) Act 2003, or ITEPA 2003 for short. The Intermediaries Legislation came into force in the UK in April 2000 and is contained within Chapter 8 of ITEPA 2003, whilst the Off-Payroll Legislation came into force into the public sector in 2017 and the private sector in 2021 and is contained within Chapter 10 of ITEPA 2003.
In essences, yes. They both look to counter alleged ‘disguised employment’ and the subsequent tax yield loss to HMRC when a contractor operates by providing their services via an intermediary, often their own limited company or what is known as a Personal Service Company (PSC), rather than as an employee.
The tax saving is created by the contractor avoiding paying National Insurance Contributions (NIC) and tax on employee income, instead paying themselves a small salary (often) under the NIC threshold and the rest via dividends from the PSC.
This can be done knowingly or unknowingly and is where IR35 can get very cloudy and subjective. Systems like the Contractor Compliance Portal that assess IR35 status are now assisting business and contractors alike to provide more clarity in the area.
Under the original IR35 legislation the contractor was the party responsible for assessing and determining their IR35 status, as well as being liable for any tax. The new IR35 legislation make the client responsible for assessing and determining IR35 status, with the fee-payer liable for any tax.
To confuse matters, at present there is the small-business exemption, allowing contractors providing their services to businesses of a certain size (according to HRMC guidelines) to still use the original IR35 legislation. Therefore, two sets of legislation are in operation at once, creating some confusion.
The legislation is designed to catch our ‘disguised employees’ i.e. those who are effectively an employee but provide their services with an intermediary such as a PSC purely to pay less tax.
If you have taken reasonable care to assess your IR35 status, or a party in the IR35 supply chain has done the same, often using specialist IR35 knowledge and/or system such as the Contractor Compliance Portal, then there is nothing to worry about.
The government, its departments and some MPs often peddle out the same line that ‘two people doing the same job should pay the same tax’, which is a very misleading statement. A contractor gets none of the benefits an employee often receives, such as pension contributions, holiday pay, maternity/paternity pay and the guarantee of ongoing work.
Therefore, genuine contractors working outside IR35 have the right to utilise the UK tax system efficiently and receive income via a small salary and the remainder in dividends, giving them a tax benefit over employees, but in exchange for the greater and ongoing risk they take.
No matter which legislation applies, either the intermediaries or off-payroll, it is prudent and advisable to get IR35 status assessed and documented so that if HMRC do open an investigation there is evidence to support the determination.
Under the new off-payroll legislation the client must assess IR35 status, confirm this via a Status Determination Statement (SDS) document, and pass it to the other entities in the IR35 supply chain. Under the old intermediaries legislation, there is no requirement to do this as the contractor is responsible for assessing their own IR35 status and any tax liability.
Contractors and businesses alike should therefore assess IR35 status, and of course we’re going to plug using the Contractor Compliance Portal to do this, after all it is free to use (unlike most competitors) and it does consider all the key and relevant IR35 status tests (unlike HMRC’s CEST tool, which is not fit for purpose, and does not have to be used).
The IR35 tax risk resides with differing entities in the IR35 supply chain depending on which legislation is being applied.
Where the off-payroll legislation is being applied the IR35 tax risk resides with the fee-payer. Insurance to cover this can be purchased online via the Contractor Compliance Portal to cover all entities in the IR35 supply chain, has no prospects of success clause, and provides £100,000 of cover for both representation and IR35 tax liabilities.
Where the intermediaries legislation is being applied the IR35 tax risk resides solely with the contractor and their PSC. This can be protected against by purchasing a specialist IR35 insurance that provides cover for intermediaries and off-payroll legislation claims, both the professional representation costs in the event of an HRMC investigation and any resultant IR35 tax liabilities, interest and penalties. Our sister site, Roots Contractor Insurance, provides this insurance which can be quoted and bought on a 24/7/365 basis online, with policy documentation instantly issued.
