When And Why Was IR35 (Off-payroll) Introduced?

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.

Off-Payroll in the Private Sector

The new private sector off-payroll legislation will be rolled out on 6th April 2021 – and will apply to payments made for services provided on or after this date. Similarly to the current public sector legislation, the responsibility of assessing the IR35 status of contractors will fall on the end-client.

After April 2021, if you are genuinely outside of IR35 you will still be able to operate and receive payments through your limited company. Regardless of your contract end-date or future plans, it’s always advisable to obtain an independent IR35 review of your contract from a tax status specialist.

Using an umbrella company for your payroll means there is no risk of being caught by IR35 as you are already taxed like a permanently employee. However just because one contract may fall inside IR35 doesn’t mean you won’t be able to use a limited company for outside IR35 roles in the future. So if you currently have a limited company, speak to us to discover all your options.

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