What is IR35 meaning in the UK?
A very crucial term for the locum agency workers, the IR35 meaning is something that every professional employed in the public sector should be aware of. The IR35 regulation came into effect in April 2017, bringing into effect the off-payroll working rules in the UK region. The country further revised and expanded these regulations across medium-sized and large private firms in April 2021.
Understanding these changes in the off-payroll working rules (IR35) is crucial to notice and adapt if you are either a contractor, a worker, or an intermediary providing services to the client. Similarly, if you are presently working in the private sector or planning to do so in the future, the new changes may have an impact on you too. Read the blog for more information.
Off-payroll working regulations
The off-payroll regulations apply to either a worker or the contractor who offers their services to the client through their own limited business or another sort of intermediary. In most cases, an agency worker will be the employee’s own individual service provider, but it could also be a partnership, a private service provider, or an individual.
What is IR35 meaning?
The off-payroll working rules, often known as IR35 legislation, are a set of guidelines for prohibiting “hidden compensation”. It is intended to ensure that anyone who works as an employee but through an intermediary, such as their own Personal Service Company (PSC), Limited Company, or other entity, pays roughly the same income tax and National Insurance as those applicants who are employed directly.
Concerning the private sector, it is now the employee’s responsibility to ascertain their IR35 status and to submit tax and National Insurance Contributions to the HM Revenue and Customs (HMRC) in accordance with the new regulation.
The new changes in the IR35 regulation
Just similar to the rules implemented in the public sector in April 2017, April 6, 2021’s regulation was very similar, except for the fact that the IR35 status will be determined by the hirer, and not the contractor.
This means that the hirer must:
- Keep thorough records of your decisions on your work status, along with the rationale behind them.
- Make sure you have a procedure in place to handle any disagreements that come up as a result of your actions.
- In the “Status Determination Statement,” inform the employee and the agency of your decision and the reasons behind it.
- For every single contract that you enter into with an agency or employee, determine whether or not IR35 applies to the assignment in question using the instructions offered by HMRC or a specialised third-party provider of IR35 assessments.
The importance of the new IR35 rules
As a hirer, when deciding whether a worker is under the IR35, you must exercise reasonable caution; otherwise, you may be held responsible for paying any unpaid or underpaid tax and NICs.
You must make sure that each employee working through a limited company has access to a Status Determination Statement. You will still be in charge of withholding PAYE tax and NICs from the concerned employee(s) until this is done.
You should also be informed that when the new laws go into effect, a Status Determination Statement created before April 6, 2021, will still be valid as long as it explains the rationale behind the decision. However, you should double-check your initial decision to ensure it is still valid if the engagement’s working procedures alter or a new contract is signed with the employee; if not, you will need to reevaluate the job.
If a position is determined to fall under IR35, the agency paying the employee is required to withhold tax and NI contributions from the employee’s salary at the time of receipt, regardless of whether the employee chooses to continue receiving payment through their employer.
The true determiners of the IR35 regulations
To the question “who determines whether a worker is covered by the IR35 regulations”? it is definitely the client for whom the job is being done. It is the ultimate hirer and not the intermediary worker who is in charge of identifying your IR35 status and making sure that you are paid and taxed correctly based on their evaluation of your employment status.
Steps on how the decision is made, if IR35 is applicable
The public sector organisation or the private sector will follow a set of particular guidelines under the IR35 Act when making this choice. Simply put, they must determine whether your relationship is truly autonomous or more similar to employment under IR35.
As a result, they are in charge of carefully reviewing each deal. After doing so, individuals are required to submit a Status Determination Statement (SDS) outlining their choice and its justification.
Who do the IR35 rules apply to?
The IR35 rule implies any agency worker in the public or private sectors who isn’t currently paid via PAYE. It is basically for those who get payment through one of the following agreements:
- You are employed by Personal Service Company (PSC)
- You work for an umbrella firm through an intermediary
- You receive a gross salary as a self-employed person
The meaning of small business exemption
Small enterprises in the private sector will receive a break from this law, thanks to a concession from HMRC. A business will typically be considered a small business if two of the following requirements are met:
- If it has a maximum annual revenue of £10.2 million
- If it has a maximum balance sheet total: of £5.1 million
- If it doesn’t have more than 50 staff
The fee payer, according to IR35
If you fall under IR35, the party above your PSC is your fee payer and is in charge of withholding tax and national insurance.
Typically, a recruitment agency is the one who pays the fees for the bulk of contractors. The final hirer, however, will be the fee payer and accountable for withholding tax and NI payments if your PSC is paid directly by them.
The impact of an employee who opposes IR35 determination
If a worker disagrees with your interpretation of the IR35, they should appeal to you directly or get in touch with their employer so that they can do so on their behalf.
Within 45 days after receiving an appeal, you must respond, while the worker should continue to be compensated in accordance with your original judgment. If the original decision has been altered, you must respond with an explanation of why this happened.
You will automatically take on the role of Fee Payer and, regardless of whether an agency or other intermediary is involved, you will be responsible for any unpaid, or underpaid, tax and NICs if you fail to reply to an appeal within 45 days.
The ultimate result of the IR35 rules
If a position is subject to or exempt from IR35 regulations, it is the responsibility of NHS Trusts, Health Boards, and private sector clients to notify locum agencies and employees about the same. Being under IR35 impacts your tax amount. The relevant tax and National Insurance must be deducted by the fee payer, which is the final party to pay the employee. The deductions are taken out of the intermediary’s payment and given to HMRC on their behalf.
Steps to follow to ensure a smooth transition to the new IR35 rules
- Firstly, make a list of the contractors who provide their services directly to you and the agency workers.
- As a next step, evaluate each one individually in accordance with HMRC recommendations.
- You must inform people who are directly contracting with you of your choice and the reasons for it in writing.
- For those services provided by agencies, you must inform the employee and their agency of your decision and the reasons for it in writing.
After finishing this preliminary work, it will be crucial that you implement:
- A trustworthy procedure for making sure that before any new contractors start working, you inform them of your decision on the IR35 status of their roles and explain your thinking in support of that decision.
- A procedure whereby any adjustments to working conditions and any contract renegotiations are noted and examined to see whether they lead to a change in the employment status of the affected worker(s), and
- A reliable procedure for receiving and addressing appeals from employees and/or their agencies regarding decisions made regarding your employment status
Sources: Gov.UK, HMRC, IPSE