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So, what is IR35?
03 Feb 2021
IR35 (or the Off Payroll Working rules to give it an official title) is a set of rules aimed at preventing people who are really employed by a business from forming their own company (known as a Personal Services Company or “PSC”) to obtain tax advantages. The broad concept is that people who are really employees but work through their own company are actually taxed in much the same way as any other employee.
The rules have been in place for many years but the onus was on the PSC itself to decide whether they applied or not. Over time HMRC have reached the conclusion that most PSCs were just ignoring the rules – and to be honest they are probably right.
In 2017 the rules started to change – from April of that year, public sector bodies which engaged with workers through their PSCs had to decide whether the worker was actually in an “employment-like relationship” with them. If they did then they had to operate PAYE and pay National Insurance on the amounts they paid to the PSC.
The new rules caused considerable confusion and many public sector bodies decided to take a blanket approach and treat all of their PSC workers as employees. This led to a flight of talent from the public sector as PSCs sought alternative work in the private sector.
Now, after one Covid-related false start, the new rules are going to apply to private sector contracts from 6 April 2021. This is a whole new world for PSCs, for those who engage with them and for agencies who provide workers to end users through their own PSCs. The onus is firmly going to be on the end user to decide on the nature of the relationship and for the business paying the PSC to operate PAYE if required. For the PSC and the worker, this could result in a significant change in their tax position and may lead to them questioning who they engage with, how, and whether having a PSC is even worth it any more.
Not all businesses engaging PSCs will be affected by the new rules, and not all PSCs are born equal. In the next in this series we will explore which businesses will have obligations under the new rules and what, in fact, we mean by a PSC…
Visit our hub
To help you check on your preparations for the changes to IR35, we have created the IR35 hub where you will be able to find helpful resources and information.
Written By Paul Brown | Tax Partner
Read more in our IR35 series
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