What is IR35?
IR35 is a term used to describe two pieces of tax legislation that are designed to combat tax avoidance by contractors, or in this case doctors, and the healthcare organisations hiring them. The legislation applies where a contractor is supplying services to end-clients via an intermediary, such as a limited company or a personal service companies (PSCs), however, were it not for the existence of the intermediary, the contractor would otherwise be deemed to be an employee of the end-client. They are also referred to as the ‘off-payroll’ rules.
What are the new rules?
They are not really new; the off-payroll rules have applied in the public sector since April 2017 however, HMRC are now extending the rules to apply in the private sector from the 06 April 2021. If you have worked for the NHS via you PSC previously then you will already be familiar with the rules.
The rules provide that if the PSC did not exist, but you, the contractor, looked like an employee of the end-client for tax purposes, then the assignment is deemed to be ‘inside IR35’. That means that your pay will be subject to PAYE tax and employees' national insurance contributions (NICs). Employers’ national insurance will also be due.
When do the new rules come into effect?
The new rules will apply to payments made to PSCs for work done on or after 06 April 2021.
How will it work?
At the moment, when you provide your services to a private sector client, your PSC is responsible for determining IR35 status of the role and whether it is ‘inside’ or ‘outside’ of IR35. However, that will change from 06 April 2021 when the off-payroll rules are extended into the private sector. The off-payroll rules will apply to all public authorities, and medium and large private sector clients that are not exempt.
The PSC will no longer be responsible for managing IR35. Instead, the end-client must assess the IR35 status of each assignment. The client must use an appropriate assessment process to produce an accurate status decision called a 'status determination statement' (SDS) and it must also provide its reasoning for the decision.
If the client decides that an engagement is ‘inside IR35’ the fee-payer (usually the agency) must (a) calculate the ‘deemed direct payment’ due to your PSC, and then (b) deduct PAYE tax and NICs from that payment. It must also pay employer’s NICs. If the client decides that the engagement is ‘outside IR35’ then the fee-payer can pay the PSC gross and the PSC will manage its own tax affairs.
Can you dispute the client’s decision?
Clients must always take reasonable care when making it status decision. Having made the tax status decision, the client must pass that decision, and the reasons for that decision, to both the party they contract with (usually the agency) and to you the contractor (including where the client does not have a direct contract with you).
You may not agree with the client's IR35 status decision, but you can ask it to look again at its decision. The client must set up a status disagreement process to help resolve disagreements about the status decision reached. The client must respond within 45 days of receiving a query.
What do I need to do before 06 April 2021?
If you work in the private sector through a PSC and you have assignments booked on or after 06 April 2021 then you should soon receive notification of the end-client’s IR35 status determination and whether the client deems the assignment to be ‘inside’ or ‘outside’ of IR35, together with its reasoning. If you have not yet had this communication it should arrive prior to 06 April 2021 however, you may wish to discuss with you recruitment consultant; we are liaising with all of our private sector clients and assisting them with this period of transition. In the meantime, please do contact us if you have any queries and we will be pleased to help.
Other links
- For more information please visit HMRC website
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