The IR35 legislation is a legislation that has been used by HMRC since 1999 as an anti-avoidance tool for contractors that run their business through a limited company.
Since April 2017, The HMRC introduced some new changes to the way IR35 was applied in the public sector.
How IR35 legislation in the private sectors would affect businesses.
To be able to explain to you all how this works effectively, I will have to explain a scenario to you.
When a business, let’s say Mega Bank, has contracted Jayne Limited (another example) to provide services for them, Jayne, the director of Jayne limited, would have supplied these services.
There would have most likely been an agency or recruitment company that had connected Megabank with Jayne limited.
The IR35 legislation applies if the HMRC can prove that in the case that Jayne did not have a limited company, she would have been an employee of Mega Bank.
Supposing that Jayne was an employee, Megabank would have to pay her consultancy fees as an employment income and PAYE applied.
The changes to IR35 legislation in the private sector.
Previously, before the changes, the contractor (Jayne) had the responsibility of monitoring if -she fell under the bill.
However, the changes that were introduced under the IR35 meant that the business owner (Mega Bank or the Agency) was now in charge of checking the employment status of the contractors.
Does IR35 catch-all private-sector employers?
The answer to that question is no. Not all private-sector employers are being caught by IR35.
Private companies that are medium or large are affected the most by the changes.
What are Medium and Large Companies as defined for changes?
Medium and Large companies are defined in tax law.
They are companies that have a turnover of £10.2 million and meets at least one of these conditions
- They must have at least 50 employees
- The company must have a fixed asset base of £5.2 million.
What happens when caught by IR35 legislation in the private sector.?
If you are a contractor that has been caught by the IR35, there are three ways it could go down.
- The contractors could be offered employment by the Business (Mega Limited).
- The contractor could get paid through umbrella companies
- The contractor could also be paid VIA their limited company after PAYE is applied to the income.
What happens when Option 3 is applied?
- The business owner will have to apply the IR35 test on the intermediary company (Jayne Limited)
- If they are satisfied that the contractor (Jayne) is caught up by the IR35, they will provide Jayne Limited with an employee starter park
- They would then put Jayne Limited into the payroll and coding notice given to Jayne limited.
- They will deduct income tax and national insurance under PAYE, and then Megabank would pay national insurance at 13.8%.
- This money would be paid to Jayne limited, not Jayne herself.
- Although Jayne limited has received this money, it won’t be paying Corporation tax on the income.
- The reason for this is it’s stated specifically that income taxed under IR35 would not be taxed under corporation tax.
- If that’s the only income derived by Jayne limited is from Mega Bank, Jayne Limited would have a loss when the accounts are prepared.
- This loss can be used against every other profit made Jayne Limited such as investment income or rental income.
- Jayne needs to ensure that the investment activities are not more than 20% if she wants to claim entrepreneur relief when she finally sells her shares in Jayne Limit
The Treatment of the money paid to Jayne Limited under IR35 legislation.
- Like previously stated, no corporation tax would be paid by Jayne limited.
- Jayne limited would deduct the net amount paid under IR35 as Deemed direct cost.
- The money paid to Jayne can be deducted tax-free as Salary from the limited company.
Conclusion on proposed IR35 legislation in the private sector.
Planning is the key to dealing with IR35 legislation. If caught by this legislation, you must ensure that plans are made for personal tax and your business.