IR35 is anti-avoidance tax legislation which is designed to tax any disguised employment at the same rate as tax applied to normal employees employed directly by the client.

This means any self-employment individuals who receive payments via an intermediary such as their own personal service company and would be classed as employees if they were directly employed by the client will need to be subject to income tax and national insurance deductions by the client.

It is currently for the personal service company itself to determine the employment status of the independent contractor and to apply taxation where the contractor would not be regarded as genuinely self-employed, whereas this will change to place the liability for taxation onto the client.

Therefore, from 6 April 2021, medium and large sized businesses will require the client (not the personal service company) to determine whether the independent contractor is genuinely self-employed or not. Where the client deems that the contractor is more likely to be an employee if the contractor were directly employed by the client, then the client will be responsible and liable for deducting the income tax and national insurance contributions in the same way as if the independent contractor was an employee of its business.

The IR35 rules exempts ‘small companies’. As such, the rules will not be applied to any private company which is defined as ‘small’. A small company is defined as having:
1. an annual turnover of less than £10.2 million;
2. a balance sheet total of less than £5.1 million; and
3. less than 50 employees.

If 2 of the 3 criteria are met, then the company will be regarded as small and the changes will not apply. In other words, the tax liability will remain with the intermediary or personal service company and not with the client.

You may find the governments Check Employment Status For Tax tool (CEST) useful. The CEST tool asks a series of questions to give an indication of employment status of particular engagements.

For more information, you can contact Sarah Collier, Partner & Head of Employment at KBL on 01204 527777 or email scollier@kbl.co.uk.