IR35 Rule Change Frequently Asked Questions
The ‘IR35’ rules owe their name to the Inland Revenue’s 9 March 1999 Budget Press Release – ‘IR35’ – entitled ‘Countering Avoidance in the Provision of Personal Services’. (The legislation originally consisted of s. 60 and Sch. 12 Finance Act 2000 and in relation to national insurance contributions, s.75 and 76 of the Welfare Reform and Pensions Act 1999 and the Social Security Contributions (Intermediaries) Regulations 2000).
The legislation is also known as the ‘Off-payroll rules’. Its purpose is to ensure that freelancers who would in reality be employees for income tax purposes if they were not contracting via an intermediary – such as their limited company – are taxed as such. Here is a common structure of the contractual arrangements that tend to apply in this area:
Prior to 6 April 2017, the contractor in question had sole responsibility for ensuring that she paid tax according to her correct tax status. From 6 April 2017, Chapter 10 Income Tax (Earnings and Pension) Act 2003 came into force with respect to public sector clients (“Workers’ Services provided to public sector through Intermediaries”).
The legislation shifted the responsibility for assessing whether the IR35 rules applied from the contractor to the end-client. The end-client had a new responsibility for informing the freelancer whether or not “the condition” was met in relation to the contract in question (“the IR35 test”).
The IR35 test is that set out in section 61M(1)(d), and poses a hypothetical question: if the services were provided directly by the freelancer to the end-client without any intermediary being involved, would the employee for income tax purposes be regarded as an employee of that client?
The shift in responsibility led many public sector organisations to balk at a new and unwanted administrative headache. (In one case, NHS Improvement purported to institute a blanket ban on utilising freelance medics who operated via their own limited companies. The Locum Doctors Union challenged this via the judicial review pre-action protocol).
From 6 April 2021, Chapter 10 of ITEPA 2003 is extended to services provided to private sector clients. As businesses seek to complete their business continuity plans post-pandemic, flexible resource is more important than ever. Yet a regulatory hurdle now has to be cleared in order for business to continue engaging with freelancers in an economically viable way. From financial services to construction, and from healthcare to recruitment, medium and large end clients need a streamlined and insured process in order to ensure legal compliance and cost-effectiveness.
To whom do the new IR35 private sector rules apply?
The new rules apply to businesses that qualify as medium or large. The definition of “medium or large” is premised upon whether the business qualifies as small: in other words, if a business is not small then it is medium or large (see sections 60A to 60G, applying Companies Act 2006).
A company will be small for the following tax year if, examining its accounts, it meets two of the following conditions:
• It has a turnover of not more than £10.2m
• It has a balance sheet total of not more than £5.1m
• It has not more than 50 employees
If two of these conditions are not met by the business in question, then it qualifies as medium or large, and the IR35 rules apply.
The introduction of ‘status determination statements’ has understandably caused some consternation in the marketplace for freelance services. The new legislation requires the client to issue a statement that sets out whether what could be called ‘the IR35 test’ is or is not satisfied, and to provide reasons for its conclusion.
If the client does not provide a status determination statement, or if reasons are not provided, then the client becomes the ‘fee-payer’ and bears the responsibility for deducting PAYE and NI from the payments to the freelancer’s intermediary. Since many businesses utilize freelancers precisely because they wish to remove the administrative and costs burden of having responsibility for more staff, this challenge has had a somewhat chilling effect on the market for freelancers and the services they provide.
The good news is that the new compliance standard can readily be satisfied by utilizing a clear and consistent combination of barrister-led legal services and legal technology.
Wolf is the first barrister-led IR35 legal technology company in England and Wales. It combines the regulatory and compliance expertise of leading Counsel with clear and consistent legal technology that has been constructed by Europe’s leading software-as-services developers.
Wolf has succeeded in transforming the IR35 hurdle into an opportunity: from streamlining on-boarding processes, to complying with anti-money laundering best practice and the new IR35 rules, Wolf’s approach supports and underwrites medium and large business’s economic recovery by maximising tax and regulatory efficiencies while minimising costs.
In the past year alone Wolf has saved medium and large business over £20m, a record that is increasingly exponentially as our processes are absorbed by a market that is demanding 21st century solutions to legal and regulatory compliance.
The founders of Wolf IR35 Legal Services have decades of experience of working with recruitment agencies on the IR35 and off-payroll rules, the managed service company legislation, the anti-avoidance legislation and issues of employment status involving limited company contractors. We have deep expertise as providers of structured compliance services that allow recruiters to continue to provide resources to their clients in a dynamic and cost-effective way.
Wolf Legal Services is a trading name of MAP Legal Technics Limited, an entity authorised and regulated by the Bar Standards Board of England and Wales