IR35: working examples of how the regime works

In this article, tax lecturer and expert Tim Palmer shares his advice for dealing with IR35.

IR35 rules governing off-payroll workers and disguised remuneration will soon be coming to the private sector. But the scheme itself is not new. It was introduced to the public sector on 6 April 2017.

From 1 April, private sector employers will need to understand how the scheme operates and will require good advice.

Here’s an explainer of how it will work, looking situations from the public sector.

IR35: are you ready?

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IR35 changed within the public sector from 6/4/2017. Suddenly, the NHS, the Police, the fire brigade and universities (amongst others) in the public sector, were having to decide whether or not to deduct PAYE and NIC from a personal service company’s (or partnership’s) fees.

Fred is a human rights specialist. He regularly supplies his services to the police via his personal service company, Fred Ltd.

The police has to decide… if he didn’t have his company i.e. he worked directly as an individual for the police, would he be a employee?

To avoid IR35, Fred would have to prove, without the protection of his company, he would be self-employed with regard to his engagement with the police.

After careful consideration, the police decide that if they engaged him directly (without his company), he would be an employee.

The four main factors that the police took into account were

1. Control

There must be no control or absolutely minimal control over him by the police, which was the case.

2. No mutuality of obligations

There must be no ongoing and regular obligation for the police to have to give Fred work and Fred also must have no obligation to accept it.

To be self-employed you must be able to show that you can turn work down!

HMRC conveniently try to ignore mutuality of obligations. Indeed it was not featured whatsoever on the first version of CEST. This is unfair!

The judges in court do not ignore mutuality of obligations! It has regularly been an important and deciding factor in many cases over the years both in the past and more recently!

To be self-employed, you must win both of these first two i.e. no or minimal control and no mutuality of obligations.

3. Substitute

Has Fred got the right to provide a substitute for himself to provide the service to the police?

The key question here is, who has control. Does Fred have the right to approve, choose and engage the substitute Alan?

Or is the the responsibility shared or the right of the police?

4. Insurance

Does Fred Ltd pay the relevant insurance i.e. professional indemnity insurance?

This is an important factor, but HMRC will try and dismiss this! They should not! Employees themselves will not pay this type of insurance!

The Consequences

Say Fred Ltd bills the police £20,000.

The police would have to put this £20,000 fee through their payroll as if they were employing Fred. They have to deduct PAYE and NIC Class 1. The police would also have to pay 13.8% employer’s NIC on the fees.

The net fee, after PAYE and NIC would be paid to Fred Ltd. Fred would then have to extract this net fee from his company as either tax free salary or dividend. A complex and time consuming exercise!

The Private Sector

The ‘public sector’ IR35 rules effectively come into the private sector from 6/4/2020.

If the private sector engager is medium sized or large, they are responsible for the decision: ‘Is the engagement caught to IR35?’

A medium or large sized engager is one who meets two or more out of the following three tests:

  1. Turnover more than £10.2 million
  2. Assets more than £5.1 million
  3. More than 50 employees

This engager will deduct PAYE and NIC in a similar fashion to the police in the example above.

There are a lot of other factors to consider such as the role of agencies, appeal procedures, the corporation tax position etc., etc.

Tim will cover the remaining areas in detail, with the aid of practical case studies on his AAT half day course on 21st February 2020.

Further reading on IR35:

Tim Palmer is one of the UK’s most prolific and popular tax lecturers..

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