Employment Tax update: IR35 – where are we now?

The IR35 rules look to stop the perceived avoidance of income tax and national income tax contributions (NIC) through the use of intermediaries.

Whilst the new rules have been bedding in, some high profile cases have been going through the courts recently, as well as the release of a welcome proposal for the offset of tax liabilities, so we give a quick round up of where we are now with IR35.

Rules and responsibility

Since April 2021, medium or large size businesses engaging contractors via an intermediary (such as a personal service company) have been responsible for assessing whether IR35 rules should apply to payments made to contractors they engage. All public sector businesses, regardless of size, engaging contractors have been subject to these rules since 2017.

Where it is determined that the worker would have been considered to be an employee if they had provided their services directly to the business, the engaging business will be responsible for deducting tax and NIC from any payments made to them.

If the business (or group) is small in size, the onus for making this assessment and applying IR35, remains with the contractor and their personal service company.

Recent case law

Gary Lineker was recently successful at the First Tier Tribunal (FTT) in arguing that the IR35 rules did not apply. HMRC assessed Gary Lineker for almost £5 million in underpaid tax and NIC over a five year period for services provided to the BBC and BT Sport. The FTT found, however, that the IR35 rules could not apply in this case as the contracts with the BBC and BT Sport were made directly by Lineker and not via an intermediary.

It is understood that HMRC have appealed the decision to the Upper Tier Tribunal but this case will focus on whether the IR35 rules were in point rather than the employment status of Lineker.

Other high profile cases include Kaye Adams, Paul Hawksbee, Lorraine Kelly and Helen Fospero, who all successfully argued that they would not have been deemed employees in the absence of their personal service companies.

HMRC have, however, had some successes including Christa Ackroyd where it was found that there was an employment relationship with the BBC when she presented the programme ‘Look North’.

All of these cases relate to periods prior to the changes highlighted above and if HMRC were to challenge the arrangements now, they would have to do so via the contracting party e.g. the TV and radio channels themselves.

Due to the risk to businesses, we have seen many companies taking an overly cautious approach and insisting that contractors are treated as employed, if there is any possibility that they may be caught by the IR35 rules.

Proposed offset of tax

If it is found that the IR35 rules have not been operated correctly, HMRC will look to recover income tax and NIC in full on any payments made by the deemed employer. Some tax and NIC, however, may already have been suffered by the deemed employee from salary or dividend remuneration from the intermediary as well as corporation tax paid by the intermediary in respect of the engagement.

Although the worker can currently apply to HMRC for a refund of overpaid income tax and NICs, at the moment it is not possible to offset any tax and NICs already paid by the worker against the PAYE liability of the deemed employer. A recent consultation looks to address this issue recognising that the employer should not solely burden the liability and allowing for the offset of taxes already paid to date on that engagement, rather than the worker being able to claim an overpayment refund.

Similar rules are already in place where it is found that a worker engaged directly has incorrectly been treated as a self-employed sole trader.

Get in touch if you need help in assessing your responsibilities and/or determining whether engagements could be subject to IR35 rules.

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