IR35

Short Guide to IR35

What is IR35?

IR35 is actually the name of an HMRC press release but we use it as shorthand for the tax rules governing temporary workers when they are supplied through a third-party company or agency.  These are set out in law as the employment intermediaries legislation in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) Part 2 Chapter 8, sections 48 to 61, and the Social Security Contributions (Intermediaries) Regulations 2000 (SI 2000 No 727).  

What are the IR35 rules?

The rules are designed to prevent people from using company structures to avoid paying tax at the rate that they would have to pay if they were employed directly.

Companies are frequently used to avoid the creation of an employment relationship between a worker and the organisation they are actually working for. Typically, the company is a micro-business owned by one person who is also often the sole employee. Such companies are often referred to as Personal Service Companies, although this is not a term recognised in law.       

Although this way of employing people can be exploitative when used for some groups of workers, it generally suits both parties when used in relation to temporary senior staff where neither party wants to inadvertently create an employment relationship.  It does however open up the potential for income tax to be avoided or minimised when used in relation to roles that would be classed as employment if the contract was with a person rather than with a company. The IR35 rules seek to avoid this by making work which would normally be classed as employment subject to tax even when it is carried out under a contract with a third party company.

Up until 2017 the onus for determining whether or not work carried out under contract fell in or outside the scope of the IR35 rules sat with the company, i.e. the legal employer of the worker concerned.  This changed for public sector contracts in that year to make the end client responsible for making the judgement.  Responsibility for making appropriate deductions was also taken away from the company.  Where the end customer contracts directly with the worker (or more accurately with the worker’s company) they must treat the worker for tax purposes as if they were employed.  Where the worker is provided by a so called intermediary, like APSE Solution, it is the intermediary that takes care of the tax and national insurance deductions.  

How does it work in practice?

APSE Solutions maintains a large database of interim managers, all of whom are employed by a registered company. Most of the companies are PSCs but some are small consultancies with more than one employee.  Either way, all of the interims must enter into an Associate Agreement with APSE. This ensures that they meet high standards and carry appropriate levels of insurance.

When an APSE member council approaches Solutions with an interim requirement, the interim team sources appropriate candidates to provide a selection of CVs to the customer.  As a matter of course, they ask the customer to determine whether the IR35 rules apply or not.  This is a legal requirement.  The team can provide general advice as to how to make the decision but it must be made by the end customer.  Once the decision is made the customer has no further responsibilities in relation to tax or national insurance.

APSE has a dedicated pay roll for its interim managers and well-developed processes and systems to minimise any problems that may arise. The Solutions team is highly experienced and will handle any problems with tax and national insurance, leaving the customer and interim free to focus on getting the job done.           

For more information on IR35, click here to visit the HMRC website. 

If you have any questions regarding IR35 in a specific project, please contact Emma or Nathan.