IR35 - which has been around for over 16 years - is a set of rules affecting income tax and NIC payments of individuals who supply their services to clients via an intermediary such as a personal service company (PSC). If IR35 applies then the PSC (or other intermediary company) has to operate PAYE and NIC on any wages paid to the worker during the tax year. The legislation was enacted to ensure individuals who worked "off pay-roll" through their own company paid appropriate taxes on their income. The rules are somewhat complicated and difficult to understand, not least in terms of identifying who it applies to in the first place.
Until now it has fallen to the PSC to determine whether the rules applied to any contract they were party to by looking at factors such as whether personal service is required, whether the worker was entitled to holiday and sick pay, who supplied the tools and whether the client controlled how and where the work was done. In the private sector this arrangement will continue but, following a consultation in 2016, in the public sector liability for determining whether IR35 applies and the associated tax liability will transfer from the PSC to the public sector end client. This will take effect from the new tax year starting 6 April 2017.
HMRC intend to provide a new interactive on line tool to assist when deciding whether IR35 applies. This sounds positive, but in reality employment status is rarely straightforward as evidenced by the number of complex cases which have considered this issue over the years. HMRC have confirmed they will be bound by whatever outcome the tool produces, but whether those caught by it are willing to accept it without challenge remains to be seen.
HMRC have confirmed that for the time being there are no plans to apply similar changes to private sector contractors. However, it may well be that, if this initiative is successful, it will also be rolled out to the private sector.