From 6 April 2021, medium and large sized non-public sector organisations are now responsible for applying the reforms to the IR35 rules. Small private-sector organisations remain exempt.

When does IR35 apply?

IR35 applies where an individual, such as a contractor or consultant supplies their services to an organisation via an intermediary. The rules are primarily aimed at preventing tax avoidance, if the individual would have held employee status.

If IR35 applies, the organisation paying the contractor’s fees is deemed to be their employer for tax and national insurance purposes. This means that they must pay the national insurance contributions in relation to the contractor and deduct income tax and employee NICs from their fee.

Organisations that are an incorporated entity are classified as medium or large if, for the last two consecutive financial years, they meet two of the following criteria:

  • turnover is more than £10.2 million;
  • has an average of more than 50 employees; and
  • balance sheet total is more than £5.1 million.

Are there any exceptions?

An organisation that meets the above criteria will not have to operate the IR35 rules if:

  • there is an umbrella agreement in place (under which the individual is already on PAYE);
  • an agency operates PAYE in relation to the individual;
  • the individual is engaged as a sole trader;
  • the client fully outsources the service.

To meet their IR35 responsibilities, organisations needs to carry out an assessment and issue a status determination statement before making payment for the contractor’s services. 

HM Revenue and Customs provides a free online tool for carrying out employment status assessments – the CEST (Check employment status for tax). This will determine whether the engagement is inside or outside the IR35 rules.

An organisation may be liable for the contractor’s tax and national insurance contributions, as well as the employer NICs with interest charged for late payment if it fails to abide by the IR35 rules. HMRC can also issue penalties, set at a percentage of the tax and NIC liability.

If you would like to discuss this topic in more detail or would like more information, contact Ramshaw HR today.

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