IR35: How the Public and Private Sector reforms affects contractor

What is the IR35 Public Sector and Private Sector Reform for Contractors?

IR35 is a legislative measure crafted to tax ‘disguised employees’ at a rate akin to regular employees. A ‘disguised employee’ refers to an individual who functions as self-employed through an intermediary, like a personal service company, aiming to evade National Insurance Contributions (NIC) and Income tax payments at the rates applicable to conventional employees.

Due to the rise in the number of contractors engaged by both public and private sector entities, the Chancellor emphasised the necessity of ensuring proper taxation for all contractors. If their responsibilities closely mirror those of employees, they will be taxed in line with standard employee rates.

During the Autumn Budget statement in 2016, the Chancellor unveiled modifications to IR35 legislation in the public sector to address system abuse. These rules were subsequently extended to the private sector for medium-sized and large businesses starting from April 2021.

The alterations to IR35 involved tightening the regulations surrounding contracting in both public and private sectors by transferring the responsibility of determining IR35 status to the end-client. This change stems from the belief that the end-client is better positioned to comprehend the role and responsibilities of the contractor, facilitating a clear distinction between contractor and employee status.

Read More:

• IR35
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• IR35: How this could affect you and your company
• Understanding IR35, CEST, and the new April 2020 rules

 

What do the IR35 Public and Private Sector Reforms mean in practice?

The IR35 reform underscores that the end-client is tasked with determining IR35 status, transferring this responsibility from the contractor. This shift necessitates that the engager possesses a sound understanding of IR35 legislation to discern whether the contractor falls within IR35 or outside IR35.

To aid in this determination, HMRC created the ‘Check Employment Status for Tax’ (CEST) tool. This tool assists in establishing whether the contractor is genuinely self-employed or should be categorised as an employee for tax purposes. Those falling inside IR35 will be obligated to pay NIC and Income Tax. The tool caters to contractors, agencies, and the hiring body.

Authorities which may be affected by IR35 include:

• Governmental departments
• NHS
• Fire and police departments
• BBC
• Channel 4

The IR35 reforms and their influence on the tax and National Insurance liability of contractors have compelled many to reconsider their operating structures to enhance take-home pay. Some have opted to shift to employment, rendering their limited company redundant. If you decide to close your limited company, it is advisable to consult with one of our licensed insolvency practitioners to explore potential options for solvent liquidation.

Considering the IR35 changes, you might be contemplating the closure of your limited company to adopt a more tax-efficient approach to work. Reach out to a licensed insolvency practitioner at one of our nationwide offices to explore the optimal solvent liquidation option, including a Members’ Voluntary Liquidation. We possess expertise in IR35 liquidations and can assist in resolving outstanding matters with creditors before the closure of your limited company, enabling you to extract funds tied up in the most tax-efficient and cost-effective manner possible.