IR35, or off-payroll as it is now commonly referred to, came into effect in April 2000 as a way for HMRC to collect taxes and National Insurance Contributions (NICs) from disguised employees.
A disguised employee is a worker who supplies their services to clients via an intermediary – such as a limited company – who would otherwise be an employee if the intermediary were not used. Since most contractors who operate limited companies are the only director and shareholder, these are now referred to as Personal Service Companies (PSCs). Prior to 2017, all contractors operating via PSCs were able to determine their own IR35 status, and therefore legally make savings on income tax and National Insurance as a company providing a service to the end-client company.
HMRC came to the conclusion that too many individuals with PSCs were operating more similarly to employees, and were avoiding paying the correct amount of tax and NICs. As a result, ‘Off-payroll in the public sector’ was introduced in April 2017 to tackle this perceived tax avoidance through the use of intermediaries in the public realm (including the NHS and government departments). With most contract roles in the public sector falling inside IR35 due to the nature of the work, the best payroll options in the public sector are now umbrella company or agency PAYE.
In 2018, the government decided to go one step further and announce that the off-payroll rules will be adapted and rolled out to the private sector. The government acknowledged that adapting the rules to the private sector would need to be done with more care and due diligence, so the introduction of the rules was delayed until April 2020, following a number of consultations on how to approach the process. The government has since delayed the implementation of the legislation until April 2021 as part of a package of measures introduced to support businesses through the coronavirus pandemic.