The IR35 rules are designed to prevent individuals from using intermediary business structures – usually a personally or family owned company – to avoid or reduce their income tax and National Insurance liabilities.
The company invoices for the individual’s services on the basis it is the entity which is supplying them, not the individual. The company then usually passes on some or all of the fees to the individual in the form of dividends – avoiding most of the tax and all of the National Insurance that would otherwise be payable.
The IR35 legislation requires the intermediary entity to pay income tax and National Insurance contributions (NICs) on all income from a contract if that contract would be a contract of employment but for the interposition of the intermediary. The IR35 rules target the intermediary entity and engagers could pay the intermediary’s invoices without deduction of income tax or NICs but only a very small number of these companies apply the rules properly.
Therefore HMRC have changed the law so it is now the engagers who are responsible for deciding if the rules apply and are liable to deduct the equivalent of income tax and NICs if the engagement is effectively employment. This applies to all organisations who are medium or large in Companies Act terms i.e. at least two of the three points below apply:
- Turnover (other than from grants and donations) exceeds £10.2 million
- Gross assets (fixed and current assets) exceed £5.1 million
- Average staff numbers on payroll exceed 50