The Intermediaries Legislation, often referred to as IR35, was introduced in April 2000.
IR35 is a piece of tax legislation which was created to ensure that contractors operating as ‘disguised employees’, were paying the correct amount of tax and National Insurance (NI). This is done through taxing this category of contractor in a similar fashion to those in employment.
IR35 affects all contractors who are operating through an intermediary, usually a personal service company. The barrier of their personal service company allows them to benefit from Income Tax and National Insurance savings.
Effective as of the 6th April 2021, the IR35 reforms to the private sector mean that contractors will no longer hold the responsibility of determining the employment status of their assignments.
As a recruiter, the IR35 reforms to the private sector will have a significant impact upon you and your contractors. As a result, it is essential that you are prepared and have implemented processes in order to manage these reforms as seamlessly as possible. It is essential that you have a good understanding of the reforms to ensure you have robust systems in place to protect all parties in the supply chain.
Delivering the IR35 status decision
Where the organisation engaging the personal service company is medium or large (defined as exceeding 50 employees and turning over more than £10.2m a year), the reforms to the private sector will see end hirers become the responsible party in providing Status Determination Statements (SDS) to both the contractor and the first agency in the supply chain.
Introduced with the April 2021 reforms, an SDS declares a contractor’s employment status following an IR35 assessment and provides the reasoning behind the determination. This statement must be provided before the contract begins, and must meet the basic criteria:
- Identify all parties in the supply chain, providing names, addresses and role descriptions
- State the finding of the determination, this will be either inside or outside IR35
- Provide reasons for the determination outcome
- Detail the appeal process should the contractor wish to appeal the decision
Making payments and deductions
The entity responsible for paying the contractor (referred to as the fee-payer) will be responsible for deducting Income Tax and National Insurance contributions from the contractor’s gross pay. This may include your recruitment agency if you hold the position of fee-payer.
Following the reforms, where HMRC believe there is no realistic prospect of recovering the outstanding tax and National Insurance from the fee payer, they will initially seek to recover it from the first UK agency the end hirer contracts with. If this is not possible, they will seek to recover this from the end hirer.
HMRC have stated that this will only be used where they believe a tax avoidance scheme has entered the supply chain and not in cases of genuine business failure. This has highlighted the importance of using a compliant umbrella company, such as Parasol.
If your agency is the fee-payer, and once you have made the necessary deductions, these will be passed on to HMRC.
Making Real Time Information submissions to HMRC
Real Time Information (RTI) was created by HMRC to simplify the process of reporting information. All employers are required to submit information under RTI. This notifies HMRC of any PAYE liabilities employers have, and the information must be submitted on or before the date employees are paid.
The report submitted to HMRC must include any information on payments and deductions you’ve made over the month, as well as any employee personal information and details of their pay and standard working hours.
Employers must remember to file their final RTI submission of the year on time, or they could receive a penalty. What your business will pay in penalties depends entirely on how many employees you have; this is the following:
- 1 to 9 employees: £100
- 10 to 49 employees: £200
- 50 to 249 employees: £300
- 250 or more employees: £400
HMRC have confirmed that there will be a marker in the RTI system that will identify deemed employees, i.e. those which you are not employing, but you are making deductions to their pay under the IR35 legislation.
With you all the way
At Parasol, we’re with you all the way. As a recruiter, it’s likely you’ll have some questions you wish to ask around the IR35 legislation, and our experts are here to give you the answers. Simply get in touch with us or visit our recruiter hub for more information and guidance.