Who determines your IR35 status and who pays employment taxes?

‍Following IR35 changes introduced by HMRC for the private sector in April 2021, responsibility for determining your IR35 status, and which entity pays Income Tax and National Insurance Contributions (NICs), is now, largely, the same for both the private and public sectors. 

From 6th April 2021, responsibility for determining if a contract is inside or outside of IR35 usually lies with the end client (or Employment Agency) who pays your limited company, or personal service company (PSC). The rules now apply to work in the private sector and the public sector. 

There are some exemptions if your end-client is a ‘small’ company. However, almost all decisions about your employment status will now be made by your end-client or Employment Agency. This means your limited company will (usually) not be the one who decides if a contract is inside or outside of IR35.

If your contract is inside IR35, the end client (or Employment Agency) will pay Income Tax and NICs (employers and employees) to HMRC.

The end-client must make the decision and pass a record of the status assessment, known as a Status Determination Statement (SDS) to all parties in the labour chain.

The only exceptions to these new rules are if your private sector end client is based completely overseas, with no UK physical presence, or if you're working for a private sector client that meets the criteria for a small business exemption. 

If you are based overseas and working for a UK company, you should take specialist advice on the taxes you need to pay based on your country of residence. 

Small business exemption to new IR35 rules

IR35 rules now apply to ‘medium or large’ sized businesses in the private sector and all organisations in the public sector. There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:

• Annual turnover is no more than £10.2 million
• Balance sheet total is no more than £5.1 million
• No more than 50 employees.

Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the limited company or PSC and the new rules do not apply. 

Where the end-client makes the status assessment, this must be passed onto the contractor (and any agencies involved in the labour-supply chain) in the form of a Status Determination Statement.

How does IR35 affect payments made by agencies?

Often an agency will be involved in the labour supply chain between the end client and a limited company (and worker) which can complicate the flow of funds and deductions for Income Tax and NICs. The following illustrates the differences between the public sector and the private sector where an agency is involved.

Assignments that are ‘inside IR35’ when an agency is involved

1. End client pays the agency for the work done by the limited company (its worker)
2. End client is responsible for determining IR35 status of the worker (because the end client is best placed to establish employment status based on contract and working practices) 
3. End client passes on the SDS to the agency who must in turn pass it on to the contractor before the contract or assignment starts
4. If inside IR35, the agency pays Income Tax and NICs (employers and employees) to HMRC and pays the net amount to the limited company (because the agency makes the payment to the limited company)
5. The limited company pays the net amount to the worker by way of a tax-free dividend or salary. Our Crunch software can take care of this for you.

Assignment is ‘inside IR35’ and for a ‘small business’ within the private sector (when an agency is involved)

1. End client pays the agency in return for work done by the limited company (its worker)
2. Agency pays the contracted amount to the limited company
3. Because the small business exemption applies, the limited company (or PSC) is responsible for determining the IR35 status of the worker
4. If inside IR35, the limited company pays a deemed employment payment to the worker. This payment will have Income Tax and Employees NICs deducted and paid to HMRC. The limited company will also have to pay any Employers NI that’s due. Again, our Crunch software can manage this for you.

Changes were made to IR35 in the private sector on 6th April 2021

The private sector changes shifted the responsibility for making IR35 status assessments from the intermediary providing the worker (i.e. the limited company or PSC) to the agency or the end client who pays the limited company. The following changes were made to IR35 in the private sector on 6th April 2021:  

• Businesses (end-clients) at ‘medium-sized’ and ‘large’ companies are now responsible for assessing an individual’s employment status
• The reform does not apply to the smallest businesses if they meet the classification of a small company
• Medium and large businesses now need to decide whether the IR35 rules apply to an assignment with individuals who work through an intermediary, such as a limited company or PSC
• Where it is determined that the IR35 rules do apply, the business, agency or third party that pays the individual’s limited company or PSC must deduct Income Tax and employee National Insurance Contributions (NICs) and pay employer NICs to HMRC
• HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform, and businesses’ decisions about whether their workers fall within the IR35 rules will not automatically trigger an enquiry into earlier years

If you’re in need of more information, or active support from a team of experts, our IR35 Hub has all the information you need, whether you’re an end-client, recruiter or contractor. Crunch has a range of products and tools to help you navigate IR35 and get the best possible outcome for your business.